Weathering the Storm: How Public Insurers are Responding to Climate Change

Abstract

Climate change poses a pertinent threat to the property and casualty (P&C) insurance industry, as insurers are tasked with providing affordable policies while trying to remain profitable given the heightened risk. Without insurance, residents in areas experiencing climate disasters might become reliant on insolvent state government programs to help them rebuild, or they might relocate if they have the means to do so. This paper seeks to understand how insurers are responding to these climate threats in their earnings call transcripts, while also considering the corresponding market actions in share prices and equity research reports. Existing literature has often overlooked the intersection between climate and insurance specifically, focusing more on predicting stock prices over a short time horizon. This paper's novelty comes from applying large-scale sentiment analysis with three models (Vader, FinBERT, and ProsusAI) to this underexplored sub-sector. The results suggest a disconnect between disclosures and climate events given the low frequency of climate-related words being extracted and weak explanatory power of financial variables and damages to sentiment scores. Yet, this disconnect is in line with insurers' actions, where they are effectively offloading their risk (i.e., exiting risky areas or raising premiums to cover higher risk costs) to remain profitable, causing investors to worry less about climate risk in their valuations. Consequently, these actions cause lower-income homeowners and renters to lose coverage, exacerbating existing inequalities.