IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v17y2025i8p3423-d1633121.html
   My bibliography  Save this article

The Impact of Climate Risk on Insurers’ Sustainable Operational Efficiency: Empirical Evidence from China

Author

Listed:
  • Ziheng Xu

    (School of Mathematical Sciences, Jiangsu University, Zhenjiang 212013, China)

  • Houqing Fang

    (School of Mathematical Sciences, Jiangsu University, Zhenjiang 212013, China)

  • Weidong Wang

    (School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China)

Abstract

The operational efficiency of insurance companies is crucial for their long-term stability and sustainable development. Climate risk has emerged as a significant factor affecting insurers’ operational performance in the context of global climate change and sustainable development goals. Although prior research provides a solid foundation, further exploration is needed to clarify how climate risk influences insurers’ efficiency and underlying mechanisms. This paper uses panel data from 248 Chinese insurance companies spanning 2011 to 2021 to construct a climate risk indicator and systematically examines the potential pathways through which this indicator influences operational efficiency. Precisely, absolute temperature deviation measures physical climate risk, and an entropy-weighted method captures climate transition risk; the DEA model evaluates operating efficiency. A fixed-effects model reveals that physical climate risk may adversely affect operational efficiency, while climate transition risk demonstrates a U-shaped relationship with efficiency. Mechanism analysis shows that physical climate risk increases exposure to natural disaster losses, whereas transition risk may encourage green insurance development. Heterogeneity emerges across insurer types and between coastal and non-coastal regions, with resilient infrastructure mitigating the adverse effects of physical risks and insurance technology driving gradual transformation to offset initial transition risks. Overall, this study expands the perspective on how climate risk shapes the insurance industry’s sustainable development, offering theoretical and practical insights for policymakers to optimize risk management and promote green finance.

Suggested Citation

  • Ziheng Xu & Houqing Fang & Weidong Wang, 2025. "The Impact of Climate Risk on Insurers’ Sustainable Operational Efficiency: Empirical Evidence from China," Sustainability, MDPI, vol. 17(8), pages 1-38, April.
    • Handle: RePEc:gam:jsusta:v:17:y:2025:i:8:p:3423-:d:1633121
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/17/8/3423/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/17/8/3423/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Cummins, J. David & Rubio-Misas, Maria, 2006. "Deregulation, Consolidation, and Efficiency: Evidence from the Spanish Insurance Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 323-355, March.
    2. Ajay Gambhir & Mel George & Haewon McJeon & Nigel W. Arnell & Daniel Bernie & Shivika Mittal & Alexandre C. Köberle & Jason Lowe & Joeri Rogelj & Seth Monteith, 2022. "Near-term transition and longer-term physical climate risks of greenhouse gas emissions pathways," Nature Climate Change, Nature, vol. 12(1), pages 88-96, January.
    3. Cummins, J. David & Tennyson, Sharon & Weiss, Mary A., 1999. "Consolidation and efficiency in the US life insurance industry," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 325-357, February.
    4. Weiss, Mary A. & Choi, Byeongyong Paul, 2008. "State regulation and the structure, conduct, efficiency and performance of US auto insurers," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 134-156, January.
    5. Lyubov Klapkiv & Faruk Ülgen, 2022. "Green products in the insurance market," Post-Print halshs-04489585, HAL.
    6. repec:cup:bracjl:v:24:y:2019:i::p:-_16 is not listed on IDEAS
    7. Wenjian He & Yiyang Liu & Huaping Sun & Farhad Taghizadeh-Hesary, 2020. "How Does Climate Change Affect Rice Yield in China?," Agriculture, MDPI, vol. 10(10), pages 1-16, September.
    8. Sitong Yang & Shouwei Li & Xue Rui & Tianxiang Zhao, 2024. "The impact of climate risk on the asset side and liability side of the insurance industry: evidence from China," Economic Change and Restructuring, Springer, vol. 57(3), pages 1-51, June.
    9. Tone, Kaoru & Kweh, Qian Long & Lu, Wen-Min & Ting, Irene Wei Kiong, 2019. "Modeling investments in the dynamic network performance of insurance companies," Omega, Elsevier, vol. 88(C), pages 237-247.
    10. Bolton, Patrick & Kacperczyk, Marcin, 2021. "Do investors care about carbon risk?," Journal of Financial Economics, Elsevier, vol. 142(2), pages 517-549.
    11. Max Tesselaar & W. J. Wouter Botzen & Toon Haer & Paul Hudson & Timothy Tiggeloven & Jeroen C. J. H. Aerts, 2020. "Regional Inequalities in Flood Insurance Affordability and Uptake under Climate Change," Sustainability, MDPI, vol. 12(20), pages 1-30, October.
    12. Schaper, Philipp, 2017. "Under pressure: how the business environment affects productivity and efficiency of European life insurance companiesAuthor-Name: Eling, Martin," European Journal of Operational Research, Elsevier, vol. 258(3), pages 1082-1094.
    13. Lukas Stricker & Carlo Pugnetti & Joël Wagner & Angela Zeier Röschmann, 2022. "Green Insurance: A Roadmap for Executive Management," JRFM, MDPI, vol. 15(5), pages 1-19, May.
    14. Huong Dang, 2014. "A Competing Risks Dynamic Hazard Approach to Investigate the Insolvency Outcomes of Property-Casualty Insurers," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(1), pages 42-76, January.
    15. Emanuele Campiglio & Yannis Dafermos & Pierre Monnin & Josh Ryan-Collins & Guido Schotten & Misa Tanaka, 2018. "Climate change challenges for central banks and financial regulators," Nature Climate Change, Nature, vol. 8(6), pages 462-468, June.
    16. Martin Eling & Martin Lehmann, 2018. "The Impact of Digitalization on the Insurance Value Chain and the Insurability of Risks," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(3), pages 359-396, July.
    17. Cummins, J. David & Weiss, Mary A. & Xie, Xiaoying & Zi, Hongmin, 2010. "Economies of scope in financial services: A DEA efficiency analysis of the US insurance industry," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1525-1539, July.
    18. Tucker, Michael, 1997. "Climate change and the insurance industry: the cost of increased risk and the impetus for action," Ecological Economics, Elsevier, vol. 22(2), pages 85-96, August.
    19. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
    20. Kousky, Carolyn, 2014. "Informing climate adaptation: A review of the economic costs of natural disasters," Energy Economics, Elsevier, vol. 46(C), pages 576-592.
    21. Biener, Christian & Eling, Martin & Jia, Ruo, 2017. "The structure of the global reinsurance market: An analysis of efficiency, scale, and scope," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 213-229.
    22. Fried, Harold O. & Lovell, C. A. Knox & Schmidt, Shelton S. (ed.), 1993. "The Measurement of Productive Efficiency: Techniques and Applications," OUP Catalogue, Oxford University Press, number 9780195072181, Decembrie.
    23. Victor Cardenas, 2024. "Managing Financial Climate Risk in Banking Services: A Review of Current Practices and the Challenges Ahead," Papers 2405.17682, arXiv.org.
    24. Girish Joshi & Ranjan Dash, 2023. "A Bibliometric Analysis of Climate Investing," International Journal of Energy Economics and Policy, Econjournals, vol. 13(3), pages 396-407, May.
    25. Olivier Deschênes & Michael Greenstone, 2007. "The Economic Impacts of Climate Change: Evidence from Agricultural Output and Random Fluctuations in Weather," American Economic Review, American Economic Association, vol. 97(1), pages 354-385, March.
    26. Dietmar Pfeifer & Vivien Langen, 2021. "Insurance Business and Sustainable Development," Papers 2102.02612, arXiv.org.
    27. Sun, Yongping & Yang, Ying & Huang, Nan & Zou, Xin, 2020. "The impacts of climate change risks on financial performance of mining industry: Evidence from listed companies in China," Resources Policy, Elsevier, vol. 69(C).
    28. Sawada, Yasuyuki & Takasaki, Yoshito, 2017. "Natural Disaster, Poverty, and Development: An Introduction," World Development, Elsevier, vol. 94(C), pages 2-15.
    29. Batten,, Sandra & Sowerbutts, Rhiannon & Tanaka, Misa, 2016. "Let’s talk about the weather: the impact of climate change on central banks," Bank of England working papers 603, Bank of England.
    30. Hong, Harrison & Li, Frank Weikai & Xu, Jiangmin, 2019. "Climate risks and market efficiency," Journal of Econometrics, Elsevier, vol. 208(1), pages 265-281.
    31. John Duncan & Robert J. Myers, 2000. "Crop Insurance under Catastrophic Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 842-855.
    32. Yllka Ahmeti & Etem Iseni, 2022. "Factors Affecting Profitability of Insurance Companies. Evidence from Kosovo," Academicus International Scientific Journal, Entrepreneurship Training Center Albania, issue 25, pages 122-142, January.
    33. Painter, Marcus, 2020. "An inconvenient cost: The effects of climate change on municipal bonds," Journal of Financial Economics, Elsevier, vol. 135(2), pages 468-482.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kakuho Furukawa & Hibiki Ichiue & Noriyuki Shiraki, 2020. "How Does Climate Change Interact with the Financial System? A Survey," Bank of Japan Working Paper Series 20-E-8, Bank of Japan.
    2. Kaffash, Sepideh & Azizi, Roza & Huang, Ying & Zhu, Joe, 2020. "A survey of data envelopment analysis applications in the insurance industry 1993–2018," European Journal of Operational Research, Elsevier, vol. 284(3), pages 801-813.
    3. Lei Peng & Zhaotong Lian, 2021. "Diversification and efficiency of life insurers in China and India," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(4), pages 710-730, October.
    4. Eling, Martin & Jia, Ruo, 2018. "Business failure, efficiency, and volatility: Evidence from the European insurance industry," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 58-76.
    5. Stefano Giglio & Bryan Kelly & Johannes Stroebel, 2021. "Climate Finance," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 15-36, November.
    6. Shoaib Alam Siddiqui & Ali Shaddady, 2023. "How Profit Efficient is Indian Life Insurance Industry: A DEA Study," SAGE Open, , vol. 13(4), pages 21582440231, December.
    7. Eling, Martin & Jia, Ruo & Schaper, Philipp, 2017. "Get the Balance Right: A Simultaneous Equation Model to Analyze Growth, Profitability, and Safety," Working Papers on Finance 1716, University of St. Gallen, School of Finance.
    8. Fan, Wenna & Wang, Feng & Zhang, Hao & Yan, Bin & Ling, Rui & Jiang, Hongfei, 2024. "Is climate change fueling commercial banks’ non-performing loan ratio? Empirical evidence from 31 provinces in China," International Review of Economics & Finance, Elsevier, vol. 96(PA).
    9. Davide Lanfranchi & Laura Grassi, 2021. "Translating technological innovation into efficiency: the case of US public P&C insurance companies," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 11(4), pages 565-585, December.
    10. Biener, Christian & Eling, Martin & Jia, Ruo, 2017. "The structure of the global reinsurance market: An analysis of efficiency, scale, and scope," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 213-229.
    11. J. David Cummins & María Rubio-Misas, 2022. "Integration and convergence in efficiency and technology gap of European life insurance markets," Annals of Operations Research, Springer, vol. 315(1), pages 93-119, August.
    12. Shoaib Alam Siddiqui, 2024. "The Effect of Branch Office Locations on Technical Efficiency: Evidence from the Indian Life Insurance Industry," Global Business Review, International Management Institute, vol. 25(6), pages 1559-1575, December.
    13. Hans Degryse & Roman Goncharenko & Carola Theunisz & Tamas Vadasz, 2020. "When green meets green," Working Paper Research 392, National Bank of Belgium.
    14. María Rubio‐Misas, 2022. "Analysis of insurers' performance using frontier efficiency and productivity methods. The great contributions by David Cummins and Mary Weiss," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 25(4), pages 445-489, December.
    15. Degryse, Hans & Goncharenko, Roman & Theunisz, Carola & Vadasz, Tamas, 2023. "When green meets green," Journal of Corporate Finance, Elsevier, vol. 78(C).
    16. Mohammad Nourani & Qian Long Kweh & Irene Wei Kiong Ting & Wen-Min Lu & Anna Strutt, 2022. "Evaluating traditional, dynamic and network business models: an efficiency-based study of Chinese insurance companies," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(4), pages 905-943, October.
    17. Ye, Liping, 2022. "The effect of climate news risk on uncertainties," Technological Forecasting and Social Change, Elsevier, vol. 178(C).
    18. Venturini, Alessio, 2022. "Climate change, risk factors and stock returns: A review of the literature," International Review of Financial Analysis, Elsevier, vol. 79(C).
    19. Martin Eling & Martin Lehmann & Philipp Schaper, 2022. "Optimal labor and capital utilization by financial firms: evidence from the German property and casualty insurance industry," Journal of Business Economics, Springer, vol. 92(5), pages 853-897, July.
    20. Md Lutfur Rahman & Sudipta Bose, 2025. "Firm-level Climate Vulnerability and Corporate Risk-taking: International Evidence," Working Papers DP-2024-36, Economic Research Institute for ASEAN and East Asia (ERIA).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:17:y:2025:i:8:p:3423-:d:1633121. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.