Following adverse events, insurers not only raise premiums but also delay claim payments, potentially imposing high state-contingent costs on clients who experience losses. These delays increase losses payable, one of the largest liability items on insurers' balance sheets, augmenting insurer liquidity analogously to interest-free credit. Claim payment delays are larger and more prevalent for insurers that are less capitalized, less liquid, and those who serve clients who are less likely to complain to the regulator. In addition to losses in the same line of business, delays, unlike premiums, also increase in response to losses in unrelated lines of business.

We construct a novel physical risk factor by forming a portfolio of REITs, long on those with properties more exposed to climate risk and short on those less exposed. Combined with a transition risk factor, we assess the climate risk exposure of P&C and life insurance companies in the U.S. Insurers can be exposed to climate-related physical risk through their operations and transition risk through their $12 trillion of financial asset holdings. We estimate insurers’ dynamic physical and transition climate beta, i.e. their stock return sensitivity to the physical and transition risk factors. Validating our approach, we find that insurers with larger exposures to risky states have a higher sensitivity to physical risk, while insurers holding more brown assets have a higher sensitivity to transition risk. Using the estimated betas, we calculate the expected capital shortfall of insurers under various climate stress scenarios.

The insurance sector has undergone significant changes in risk regulation in recent decades. This paper examines how risk-based capital regulation impacts the evolution of insurance product markets. Risk regulation affects insurance product markets through both supply, from insurers adjusting, and demand sides, from households limiting purchases from high risk insurers. We exploit a natural experiment, the adoption of risk-based regulation in the UK, to distinguish between supply and demand effects. We do so exploiting a first-of-a-kind granular database derived from regulatory stress tests detailing insurers' risk exposures across key factors. We show that the insurance sector is increasingly moving away from its traditional role of insuring against a range of different risks to merely serving as a pass-through for investments into mutual funds. We provide causal estimates of the shift in insurers' product composition and market concentration. Furthermore, we explore how differences in regulatory environments across countries contribute to variations in insurance portfolios, suggesting that stricter regulations correlate with reduced ownership of traditional insurance products, particularly among lower-income individuals. This research underscores the complex interplay between regulatory frameworks and the insurance market landscape.