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INSURANCE COMPANIES ARE KEENLY AWARE OF HOW TO ASSESS, PRICE, AND DIVERSIFY RISKS ASSOCIATED WITH THEIR LIABILITIES. But forward-looking issues like climate change, with little or no historical precedent, may pose a vexing challenge for their traditional methods of underwriting risk. And the same climate risk issues could also negatively impact the asset side of insurers’ balance sheets. For example, municipalities in climate-sensitive regions are particularly vulnerable if/when their tax revenues decline as their citizens and businesses emigrate to lower-risk climates. We think these risks will play out, and perhaps intensify, over a number of years as the adverse impacts of climate change increase in frequency and severity.
As the threat of climate change grows and losses mount, insurance companies may face the potential “double whammy” of also incurring losses on their municipal (muni) bond portfolios at the same time as their insured losses increase. (While climate change is clearly a global matter, this paper focuses exclusively on US projections and the potential impact on the muni bond market.)
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