The impact of climate change on reserves in life insurance

Abstract Climate change brings serious challenges for various sectors of the economy, including the insurance industry. One important impact is its influence on mortality rates, which directly affect the financial reserves of life insurers. Accurately assessing this relationship is essential for ensuring the sustainability and solvency of life insurance portfolios. In this study, we present a framework for incorporating climate risk into the stress testing of life insurers’ reserves. Using temperature projections generated from a stochastic version of a widely used cost–benefit integrated assessment model, we simulate shocks to mortality rates driven by changes in global average temperatures, and evaluate their impact on pricing and reserving for life insurance and life annuity policies. Our numerical analysis demonstrates material risks of mispricing premiums when climate risk is ignored, and reveals substantial differences in reserve requirements, thereby highlighting the importance of integrating climate change considerations into actuarial modeling and financial planning for life insurers.