Assessing the impact of climate change and rising temperature on life insurance portfolios

Abstract

Climate change may materially affect long-term life insurance liabilities by altering both the level and seasonal pattern of mortality. This article develops a multi-population mortality framework that combines a Hermite spline model with a distributed lag non-linear model to capture age-, region-, and temperature-specific mortality effects. We apply the framework to mortality and temperature data from 15 Spanish NUTS-2 regions and project future mortality under three shared socioeconomic pathway (SSP) scenarios. We then assess the implications for a hypothetical whole life insurance portfolio through expected death-benefit payments and portfolio profit and loss. The results reveal an important seasonal offset: warmer conditions reduce expected payoffs during winter periods but increase them during summer periods, with these effects becoming more pronounced under more severe climate scenarios and for policies issued in later years. Over longer horizons, adverse summer mortality effects become increasingly important. The portfolio analysis further shows that climate-related mortality risk can materially increase the dispersion and downside risk of portfolio outcomes, particularly under SSP5-8.5. These findings highlight the importance of incorporating temperature-related mortality effects into long-term life insurance liability projections and risk assessment.