Assessment of Climate Change Risk on Insurance Portfolios

Abstract

Purpose: The general purpose of this study was to investigate the assessment of climate change risk on insurance portfolios.

Methodology: The study adopted a desktop research methodology. Desk research refers to secondary data or that which can be collected without fieldwork. Desk research is basically involved in collecting data from existing resources hence it is often considered a low cost technique as compared to field research, as the main cost is involved in executive’s time, telephone charges and directories. Thus, the study relied on already published studies, reports and statistics. This secondary data was easily accessed through the online journals and library.

Findings: The findings reveal that there exists a contextual and methodological gap relating to climate change risk on insurance portfolios. The assessment of climate change risk on insurance portfolios reveals the significant challenges posed by increasingly frequent and severe climate-related events, impacting insurers' financial stability and policyholders' security. Key conclusions emphasize the imperative for insurers to enhance climate risk modeling, integrate climate considerations into decision-making processes, and foster collaboration with stakeholders to develop effective risk management solutions. Proactive measures are essential to address the systemic nature of climate risks, underscoring the urgency of collective action and innovation to build resilience and sustainability in insurance portfolios and broader society amidst a changing climate.

Unique Contribution to Theory, Practice and Policy: The Prospect theory, Agency theory and the Resilience theory may be used to anchor future studies relating to climate change risk on insurance portfolios. Insurers are advised to invest in advanced risk modeling, diversify risk exposure across regions and lines of business, integrate climate risk into underwriting and pricing, strengthen regulatory oversight, collaborate with stakeholders, and invest in climate adaptation and mitigation measures. These recommendations aim to improve insurers' ability to quantify and manage climate-related risks effectively, promote sustainability, and contribute to broader resilience-building efforts in the face of climate change.

Keywords: Climate Change Risk, Insurance Portfolios, Resilience, Risk Modeling, Diversification, Underwriting, Regulatory Oversight, Collaboration