Risk of financial losses resulting from the physical effects of climate change, whether acute events (catastrophes) or chronic trends (sea-level rise, droughts).
Physical climate risk refers to all financial losses and exposures resulting from the physical manifestations of climate change, as opposed to transition risk, which stems from the policies and technologies deployed to address it. Two components are distinguished. Acute risks are extreme events whose frequency and intensity are increasing: more intense tropical cyclones, floods, extreme heatwaves, wildfires, droughts. Chronic risks are long-term trends: sea-level rise, permafrost thaw, changing precipitation regimes, ocean acidification. For the insurance sector, physical climate risk has a dual face. As a risk sustained, it materializes in the loss experience of property, liability, agricultural and catastrophe reinsurance policies. As an asset risk, it affects the value of investments: a building in a flood zone or a loan portfolio exposed to rising sea levels can see its value depreciate. The TCFD (Task Force on Climate-related Financial Disclosures) framework has established a reporting standard that explicitly includes acute and chronic physical risks. EIOPA has integrated climate stress-test scenarios into its prudential supervision of European insurers. The main actuarial difficulty is non-stationarity: historical data are no longer representative of a climatic future whose parameters are evolving, which forces a shift toward forward-looking approaches based on IPCC scenarios.
A property insurer has 40% of its residential portfolio in coastal areas likely to be flooded by 2050 under IPCC RCP 4.5 scenarios. In its climate ORSA requested by the ACPR, it models the impact on its solvency ratio and concludes it must increase premiums by 15% in those zones or gradually reduce its exposure, or its SCR ratio will fall below 120% by 2035.
climate physical risk, aléa climatique, transition physique, TCFD, EIOPA stress test climatique