The Effects of Climate Change Risk on Insurance Sector under Structural Break

Abstract

Catastrophic risks that may be affected by a change in the climate are natural hazards other than earthquake and tsunami. These include hurricanes, typhoons, floods and drought. The effect that such catastrophes have on the peoples of developed and underdeveloped countries is different. Global warming may completely change the future occurrence of catastrophic events in a way that estimation based on past data may be quite impossible. This in its turn implies that insurance in the classical sense may not be adequate to cover these risks and common view accepts that measures should be taken in time. It is moreover possible that those regions that would be mostly affected would be regions where most people would be unable to be insured and hence alternative risk financing measures which will involve governments, private and public organization partnerships should be developed. The aim of this study is to analyze long run relation between paid total losses in insurance sector branches with climate change risk. In order to establish the relationship of the damages paid by the insurance sector and the climate changes, the stability of the series was tested with Augmented Dickey-Fuller (ADF) and Phillips-Peron root unit tests. Due to the effects of the breakpoints in the series in 2008, the Zivot-Andrews root unit test which takes the breaks into consideration was also used. The existence of a long-term stability relationship of the series was tested with the Engle-Granger two-phased co-integration analysis.