A multi-period model for assessing the reinforcing dependence between climate transition and physical risks of non-life insurers

Purpose Climate risks are crucial for non-life insurers due to their significant exposure to both transition and physical risks. The aim of this study is to develop a multi-period model that represents climate risks in non-life insurance, encompassing the impacts of both physical and transition risks as well as their reinforcing dependence. Literature suggests that as physical climate risks increase, the urgency for climate policies intensifies, leading to higher climate transition risks. Design/methodology/approach Our model includes a stochastic transition process affecting assets based on their exposure in climate policy-relevant sectors (green and brown investments) and a dependence structure between this process and liabilities, where the physical risks manifest as an increase in claims. Findings Our simulation indicates that the choice of the transition process, as well as the consideration of dependencies, has a significant influence on the insurers’ profit, but even more on the probability of ruin. The impact of green versus brown investment strategies varies considerably based on whether dependencies are taken into account or not. Originality/value The results of this study are intended to deepen the understanding of the effects of climate risks on non-life insurers and provide a quantitative analysis of the impact of green and brown investing within this framework.