Climate risk assessment of the sovereign bond portfolio of European Insurers

Battiston, Stefano and Jakubik, Petr and Monasterolo, Irene and Riahi, Keywan and van Ruijven, Bas (2019) Climate risk assessment of the sovereign bond portfolio of European Insurers. In: EIOPA Financial Stability Report, December 2019. European Insurance and Occupational Pension Fund Authority (EIOPA), Luxembourg. pp. 69-89. ISBN 978-92-9473-218-7


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In the first collaboration between climate economists, climate financial risk modellers and financial regulators, we apply the CLIMAFIN framework described in Battiston at al. (2019) to provide a forward-looking climate transition risk assessment of the sovereign bonds’ portfolios of solo insurance companies in Europe. We consider a scenario of a disorderly introduction of climate policies that cannot be fully anticipated and priced in by investors. First, we analyse the shock on the market share and profitability of carbon-intensive and low-carbon activities under climate transition risk scenarios. Second, we define the climate risk management strategy under uncertainty for a risk averse investor that aims to minimise her largest losses. Third, we price the climate policies scenarios in the probability of default of the individual sovereign bonds and in the bonds’ climate spread. Finally, we estimate the largest gains/losses on the insurance companies’ portfolios conditioned to the climate scenarios. We find that the potential impact of a disorderly transition to low-carbon economy on insurers portfolios of sovereign bonds is moderate in terms of its magnitude. However, it is non-negligible in several scenarios. Thus, it should be regularly monitored and assessed given the importance of sovereign bonds in insurers’ investment portfolios.

Item Type: Book Section
Additional Information: Reproduction is authorised provided the source is acknowledged. For any use or reproduction of photos or other material that is not under the EIOPA copyright, permission must be sought directly from the copyright holders.
Divisions: Departments > Sozioökonomie > Ecological Economics
Version of the Document: Published
Variance from Published Version: None
Depositing User: Irene Monasterolo
Date Deposited: 08 Jan 2020 13:18
Last Modified: 08 Jan 2020 13:19
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