Effects of Climate Risks on Non-Life Insurers' Resilience

The project is led by HEC Montréal. The academic leader is Georges Dionne, full Professor, Department of Finance, HEC Montréal.

Duration of the project: 2020-2023 (currently underway)

Effects of Climate Risks on Non-Life Insurers' Resilience

The project is led by HEC Montréal. The academic leader is Georges Dionne, full Professor, Department of Finance, HEC Montréal.

Duration of the project: 2020-2023 (currently underway)

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The objective of this project is to measure the causality effect of climate risk on insurance industry resilience, by studying the following three main empirical questions:

  • Do insurers exposed to climate risks have lower firm value or do they manage their risk efficiently? What is the industry capacity to pay for very large claims? 
  • How do catastrophic events affect the concentration of the industry in terms of mergers and acquisitions? Are climate risk events causal to mergers and acquisitions? 
  • What are the long-run benefits of mergers and acquisitions for acquirers and the industry? 

In this regard, the project research will:

  • Compare insurers’ capacity in different climate risk exposure zones;
  • Improve the methodologies of the merger and acquisition studies in the insurance literature as they do not introduce exogenous factors or use appropriate methodologies that isolate the impacts of natural catastrophes on the number and benefits of acquisitions;
  • Apply the simple popular event study approach in finance: recent economic studies show that this is not sufficient to obtain a clear demonstration of the desired causality links.

Although a variety of previous studies have examined the potential impacts of climate change on the insurance sector as well as industry responses, the particular focus of this project on mergers and acquisitions is original. Moreover, this focus is highly relevant given the expectation that larger insurance companies may have better options for diversification and risk spreading, which could imply that mergers and acquisitions are an effective response to enhance climate change resilience. Thus, the topic is of great interest and pertinent to the entire insurance industry.

 

Read the first report:

"Effects of Climate Risks on Non-Life Insurers' Resilience" [EN] | 05.2022 | Authors: G. Dionne, D. Desjardins | 
Cummins, Doherty, and Lo (2002) present a theoretical and empirical analysis of the capacity of the property liability insurance industry in the U.S. to finance catastrophic losses. Estimating capacity from insurers’ financial statement data, they find that the U.S. insurance industry could adequately fund a $100 billion event in 1997. As a matter of comparison, Hurricane Katrina in 2005 cost the insurance industry $40 to $55 billion (2005 dollars). The main objective of this research is to update their study with new data available up to the end of 2020. It shows that the U.S. insurance industry’s capacity to pay catastrophe losses is higher in 2020 than it was in 1997. For example, insurers could pay 98% of a $200 billion loss in 2020 in comparison to 81% in 1997.” .