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Abena Owusu, Montclair State University; Aparna Gupta, Rensselaer Polytechnic Institute; Jue Wang, University of Massachusetts-Amherst
Climate change poses as a serious risk for insurance firms, threatening the affordability of the impact of insurance risks and sustainability of the firms. In this research, we assess and distinguish between insurance firms’ response to climate change risks, and examine how their climate change risk exposures relate to their financial and governance characteristics. Using a text mining approach, we build a climate change dictionary with three sub-dictionaries - risk, impact and response, and apply a ‘nested structure’ feature extraction approach to extract, define and classify insurance firms’ adaptation levels to climate change risk exposures. We find that insurance firms with high exposure to climate change physical risks (event-driven (acute risk) and long term shift in climate change patterns (chronic risk)) present a high level of adaptation response to the pecuniary impact of the risks. Furthermore, these insurance firms have lower financial performance measures compared to insurance firms with low exposure to climate change risks. Relating the climate change risk features to quantitative firm characteristics in a classification and regression tree analysis, we find that reinsurance liabilities and reinsurance assets of insurance firms, in addition to the depreciation of tangible fixed assets, reserves and plant, property and equipment largely dictates climate-related risks of insurance firms.
