Climate change, ESG–based sustainability uncertainty and insurance expansion

Abstract

This paper aims to examine the combined effects of climate risk and environmental, social, and governance (ESG)-related uncertainty on insurance companies across a panel of 11 countries. This study uses the annual time series data related to 11 countries, ranging from 2010 to the 2023. The authors use the panel quantile autoregressive distributed lag regression and Granger non-causality analysis techniques. The findings show significant heterogeneity across quantiles in the determinants of insurance expansion. ESG-related sustainability uncertainty promotes insurance growth in the long run, especially in higher quantiles, while climate performance improves insurance revenues in the short run, mainly in lower quantiles. In contrast, climate change uncertainty has an immediate positive effect in countries with low insurance premiums, but its long-term impact diminishes in high-premium markets. These findings are consistent with stakeholder theory and institutional theory. Climate and ESG-related sustainability uncertainty require policy frameworks that account for the unintended effects of mitigation measures on insurers’ risk assessment and pricing while ensuring the affordability of climate-related microinsurance. Integrating uncertainty into risk models and aligning insurance practices with sustainability goals improves risk estimation and enhances the long-term resilience of the insurance sector. The authors results contribute to the existing literature on ESG and climate-related uncertainty in insurance market expansion and provide useful insights for policymakers and insurance practitioners.