Document Type : English paper for special issue on "climate change & insurance industry"

Authors

• Mahmoud Asad Samani ¹
• Sahar Haghnazari ²

¹ Chief Risk Officer of Iran Insurance Company

² Pasargad Insurance Company Expert

Abstract

BACKGROUND AND OBJECTIVES: Climate change, as a systemic risk, has posed unprecedented challenges to the foundations of the insurance industry. This study aims to examine the bidirectional impacts of climate change include physical (climate-related) and transitional (policy and market-driven) risks, on the insurance sector. Globally, the insurance industry is undergoing a fundamental transformation in response to climate change, with insurers increasingly recognizing it as a material financial and strategic risk. However, responses remain uneven across insurance territories, and practical adaptation is often limited to pricing and reinsurance adjustments rather than long-term resilience planning. In Iran, similar challenges persist. On one hand, the country is prone to a diverse range of natural disasters, predominantly earthquakes and floods. On the other hand, the insurance market still relies on traditional products and pricing models with no effective and specialized climate risk management framework. These dynamics highlight the urgency of adopting forward-looking methodologies that move beyond historical averages and incorporate scenario-based analyses. Moreover, understanding these dual impacts provides a foundation for articulating a comprehensive framework tailored to the structural, regulatory, and market-specific conditions of Iran’s insurance industry. These considerations underscore that without integrating climate science, forward-looking analytics, and adaptive governance structures, insurers will increasingly face solvency pressures and declining risk-bearing capacity. Consequently, redefining strategic priorities has become a prerequisite rather than an option. METHODS: Using a descriptive–analytical approach, this study examines both physical and transitional risks associated with climate change and their implications for the insurance industry. The analysis also draws upon key international regulatory and supervisory frameworks, including the Task Force on Climate-related Financial Disclosures (TCFD) and the Network for Greening the Financial System (NGFS) to assess how strategic adaptation and innovation can enhance the resilience and sustainability of the insurance sector. This methodological approach allows the research to integrate empirical insights with global best practices, thereby ensuring both analytical rigor and contextual relevance. Additionally, the comparative review of established international frameworks provides a benchmark for identifying existing gaps and priority areas for reform within Iran’s insurance ecosystem. The combined use of qualitative assessment and international benchmarks also strengthens the validity of the study’s conclusions, allowing a clearer interpretation of how climate risk frameworks can be operationalized within emerging insurance markets. FINDINGS: Economic losses from natural catastrophes reached USD 318 billion with 14,000 victims in 2024, denoting that 57% of the global losses were uninsured. These are up from USD 303 billion in 2023 and exceed the 10-year average of USD 254 billion. Findings reveal that the sharp increase in natural disaster losses has rendered the insurers’ traditional risk pricing and management models ineffective. Climate change is an enabler for insurers indeed as it can add new business opportunities such as green and parametric products to their portfolios as well. The evidence also indicates widening protection gaps in several regions, demonstrating the limitations of conventional indemnity-based mechanisms. Furthermore, the emergence of new climate-aligned market segments suggests that innovation capacity will increasingly determine the competitiveness and solvency outlook of insurers, particularly in climate-exposed economies. Moreover, the results highlight that insufficient diversification benefits and rising loss correlations further challenge traditional assumptions, reinforcing the necessity for insurers to adopt adaptive and technology-enabled risk management approaches. CONCLUSION: By examining both physical and transitional risks and their diverse impacts on the insurance sector, this study recommends a conceptual framework to illustrate the paradigm shift and explores how the insurance industry can evolve from a passive role as a claims payer to an active, leading role in climate risk management and in facilitating the transition toward a sustainable economy. It is expected that the insurance mechanism should facilitate and incentivize preventive actions too. The study concludes that strategic adaptation and investment in innovation are not only necessary for survival but also essential for the long-term sustainability of Iran’s insurance industry. Hence, a number of strategic approaches are suggested to cope with this situation. Ultimately, strengthening the industry’s analytical capabilities and aligning national practices with global climate-related standards will be essential for achieving this transformation. The proposed framework underscores that proactive engagement, cross-sector cooperation, and innovation-driven policies can significantly enhance the sector’s contribution to national climate resilience. In this context, the study emphasizes that coordinated regulatory reforms, sustained investment in data infrastructure, and capacity-building initiatives will be crucial for enabling a smooth transition toward a resilient, innovation-driven insurance sector.

Keywords

• Parametric insurance
• Green insurance
• Climate change
• Transitional risk
• Physical risk

Main Subjects

• Risk management in the insurance industry