Early View Article - Sustainability risk in insurance companies: A machine learning analysis

Sustainability risk in insurance companies: A machine learning analysis

Sustainable development constitutes a global challenge today, and the sustainable development goals (Agenda 2030) will probably set the course for the coming decades. This paper discusses sustainability in insurance companies by combining two aspects: a social approach (the environmental impact) and a business approach (the prediction of claims due to climate change). Our objective is to analyse the impact of physical risk in a home insurance portfolio and to measure in economic terms the effect of climate change in the future, by applying machine learning methodologies. Two data sources are used: a Spanish insurance portfolio with 31,998 policies and claims from 2017 to 2022, and daily meteorological variables from 290 Spanish weather stations from 2000 to 2022. Two climate scenarios are considered: RCP 4.5 (medium impact) and RCP 8.5 (high impact). On average for the period 2023–2052, the results reveal that claims will increase by 105% for the 4.5 scenario and by 129% for the 8.5 scenario. Our paper makes a clear contribution to sustainability by analysing climate risks and their impact on an insurance portfolio. It shows the grave consequences of climate change for the insurance sector's solvency and the political implications for the financial system in general.

Policy Implications

  • Financing policies to prevent climate change: National, regional and local governments must invest the necessary resources to prevent climate change.
  • Promoting all the political measures to tackle climate change. The political authorities must develop regulations to implement the agreements on the fight against climate change, especially the agreements of the last United Nations Climate Change Conference (COP26).
  • Enhancing Awareness of climate risk: Policies aimed at increasing investor awareness of the impact of climate change can help investors make more informed decisions. This can lead to greater investment in sustainable firms.
  • Developing additional mechanism for insurance supervisors. The policymakers should increase the controls to supervise the climate risk in insurance sector, as it may seriously affect the solvency of insurance companies in the future.
  • Facilitating the control over climate risk by the design of corporate policies for insurance companies. It is essential that the underwriting, risk management and the reserve policies of the insurance firms remain aligned to minimise the possible future impact of this risk and to avoid its transference directly to people in economic terms or the financial system.

 

Photo by Pixabay