Insurance company risk management in the context of climate change

Abstract

Climate change over the last decade has significantly complicated the risk profile of insurance companies, leading to increased losses, higher volatility in insurance payments, and the emergence of systemic threats to the industry's financial stability. The relevance of this study lies in the need to rethink traditional approaches to assessing climate-related risks and transition to models that can account for the nonlinear dynamics of the modern climate, as well as the impact of ESG factors on the sustainability of insurers. The purpose of this article is to examine the processes of transforming climate risks in the insurance sector and assess their impact on the financial stability of insurance companies. The research methodology includes a systematic analysis of scientific sources, comparative modeling methods, and a structural-functional approach to assessing risk models. Additionally, scenario modeling was employed to assess the sustainability of insurance portfolios across various climate regimes, and an ESG-oriented approach was used to evaluate the impact of non-financial factors on the insurer's risk profile. Results. The study found that the frequency and intensity of extreme events are growing faster than the relevant historical series are formed, which makes traditional statistical models ineffective. It was found that catastrophic models, EVT approaches, ML/DL algorithms, and dynamic loss models demonstrate significant limitations, including the stationarity of parameters, the lack of high-quality micro-regional data, the complexity of calibration, and the failure to account for combined catastrophic events. It has been proven that such methodological shortcomings directly affect the formation of technical reserves, the need for capital, the cost of reinsurance, and the level of financial stability of companies. Conclusions. The article also highlights the crucial role of ESG factors in shaping an adaptive risk management system. Specifically, the environmental component enhances the accuracy of assessing physical and transient risks, the social component mitigates behavioral and reputational risks, and the managerial component minimizes operational and compliance risks. The practical significance of the results obtained lies in the possibility of applying an integrated risk management model that combines actuarial methods, scenario modeling and ESG metrics to optimize tariff policy, increase the stability of the investment portfolio and form effective reinsurance strategies.