Insurers’ financial stability may be undermined by climate change, according to Standard & Poor’s (S&P).

The ratings agency has published a report in the lead-up to next week’s United Nations carbon emissions conference in Paris.

Abrupt changes in climate patterns, bringing more weather-linked claims, may affect capital adequacy through lower earnings if insurers do not make provisions, S&P analysis shows.

The analysis assumes insurers are reactive to climate change impacts, and set pricing and capital levels without taking account of changing weather trends.

“The effect of a sudden climate change shock… could test the industry,” the report says.

“Estimating how climate change will play out is inherently uncertain, so the picture may change dramatically over time. We cannot rule out the possibility that climate change could have a significant effect on insurers’ capital positions in future.”

Insurers’ capital adequacy could fall by up to 10% if financial markets take the view climate change will affect future earnings and react by adjusting market values to maintain yields. 

Multiline and life insurers are most at risk from this scenario.

“We anticipate insurers may find it difficult to quickly restore their capital positions after a capital drop of this magnitude,” the report says.

Insurers’ capital adequacy will be eroded by about 0.5% a year if the impact of climate change is gradual.

S&P says other shocks that are “more difficult to quantify” – including major disruption to the global food supply chain or melting of the Greenland ice sheet – will have major implications for insurers.

“It is very difficult to estimate the likelihood and results of reaching such tipping points. However, following such an event, an insurer’s required capital may rise.

“Additional risk to the insurer’s capital position may arise if, due to political or consumer pressure, it cannot pass on the full increase in the risk to insured parties quickly.”

The Paris conference, where more than 190 nations hope to reach an agreement on emissions, will help decide if climate change can be tackled effectively.

“Much of the uncertainty regarding the magnitude of climate change comes from the lack of clarity regarding the level of future carbon dioxide emissions,” the report says.

“This [conference] will be an important step towards reaching an intergovernmental agreement on limiting future carbon dioxide emissions, and so reducing the threat of dangerous climate change.”