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Physical Climate Risk Factors and an Application to Measuring Insurers’ Climate Risk Exposure

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Abstract

We construct a novel physical risk factor using a portfolio of REITs, long on those with properties highly exposed to climate risk and short on those with less exposure. Combined with a transition risk factor, we assess U.S. insurers’ climate risk through operations and $13 trillion in asset holdings. Estimating dynamic climate betas, we find higher stock return sensitivity to the physical risk among insurers operating in riskier regions and to transition risk among those holding more brown assets. Using these betas, we calculate capital shortfalls under climate stress scenarios, offering insights into insurers’ resilience to climate risks.

Suggested Citation

  • Robert Engle & Shan Ge & Hyeyoon Jung & Xuran Zeng, 2023. "Physical Climate Risk Factors and an Application to Measuring Insurers’ Climate Risk Exposure," Staff Reports 1066, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:96484
    Note: Revised December 2024. Previous title: “Measuring the Climate Risk Exposure of Insurers.”
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    References listed on IDEAS

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    2. Frederick Schuh & Tanja Jaeckle, 2023. "Impact of hurricanes on US insurance stocks," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 26(1), pages 5-34, March.
    3. Stefano Giglio & Matteo Maggiori & Krishna Rao & Johannes Stroebel & Andreas Weber & Stijn Van Nieuwerburgh, 2021. "Climate Change and Long-Run Discount Rates: Evidence from Real Estate [Abrupt climate change]," The Review of Financial Studies, Society for Financial Studies, vol. 34(8), pages 3527-3571.
    4. Shan Ge, 2022. "How Do Financial Constraints Affect Product Pricing? Evidence from Weather and Life Insurance Premiums," Journal of Finance, American Finance Association, vol. 77(1), pages 449-503, February.
    5. Ralph S.J. Koijen & Motohiro Yogo, 2022. "The Fragility of Market Risk Insurance," Journal of Finance, American Finance Association, vol. 77(2), pages 815-862, April.
    6. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    7. 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.
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    Cited by:

    1. Jung, Hyeyoon & Engle, Robert F. & Berner, Richard, 2025. "CRISK: Measuring the climate risk exposure of the financial system," Journal of Financial Economics, Elsevier, vol. 171(C).

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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