Climatic Variations and the Market Value of Insurance Firms

Abstract

Major insurance and reinsurance firms have expressed concern that global warming poses economic threats to the industry due to increased risk of extreme weather events. Past studies have examined the connection between global warming trends and the value of insured damages. In principle, if weather-related threats are increasing, insurance firms may face higher payouts, but they may also enjoy an expanded market for insurance products. If they are able to price the new risks appropriately they may even end up better off. This study examines whether climatic variations have historically been connected to the profitability of insurance firms. We form a portfolio of insurance firms and then estimate a three-factor model augmented with climate variables of interest. Short-run relationships between climatic variables and insurance firms indicate that temporary deviations have small but likely beneficial effects on insurance firms. Overall, our results suggest that the past increases in extreme weather conditions have not had a negative effect on the market value of insurance firms.

Keywords: Global Warming, Climate Variations, Insurers

JEL Classification: G22, Q54