The insurance industry has for a long time sought to identify the best practical methods for selecting investments to maximize returns within an acceptable level of credit risk. In this white paper, we consider how financial risks from climate change can impact insurers’ exposure to credit risk, as measured through a known structural credit risk tool, the Vasicek model. The paper presents the following sections:
- What is climate change and why does it matter?
- Introduction to credit risk modelling
- Application of the Vasicek model to transition matrices
- Modelling results