Page 6 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.82, # 1, 2025, pp. 4-18

LITERATURE REVIEW
Climate risk insurance plays a crucial role in managing the financial impacts of
climate-related disasters (Rao, S.; Li, X. (2019); Oh, S.; Sen, I.; Tenekedjieva, A.M.

(2022); Jain, D.K.; Chida, A.; Pathak, R.D.; Jha, R.; Russell, S. ( 2022); Arnold-
Dwyer, F. ( 2024); Sen, I.; Tenekedjieva, A.M. ( 2021)). It provides households and
businesses with financial protection against losses resulting from climate events.
However, challenges such as lack of perfect policies, infrastructure, and public
awareness hinder its effective implementation. State regulations significantly
influence insurance rates, leading to disparities in rate adjustments and risk reflection
across different states. In vulnerable regions like the Pacific Small Island Developing
States (PSIDS), climate-induced disasters pose significant financial risks,
emphasizing the need for efficient climate risk insurance solutions. To ensure the
sustainability of insurance markets amidst increasing climate risks, promoting risk
reduction through climate adaptation is essential. Policymakers and regulators can
play a vital role in supporting the insurance sector's contribution to climate adaptation.
The landscape of risk assessment methodologies in climate insurance has evolved
significantly. Traditional approaches focused on single hazards, potentially leading to
risk underestimations or overestimations (Westra, S.; Zscheischler, J. (2023)). Recent
developments emphasize the importance of systemic complexity in risk assessment,
highlighting the need to consider compounding and cascading risks, deep uncertainty,
and boundary judgments (Meynadier, R.; Rakotoarimanga, H.; Frobert, B.; Weisman,
A.; Lobligeois, F.; Deroche, M.S. (2023)). Financial institutions are now developing
sophisticated models to estimate climate risk damages and losses, incorporating
hazard, exposure, and vulnerability components (Baer, M.; Gasparini, M.; Lancaster,
R.; Ranger, N. (2023)). Academics, financial institutions, and regulators are
collaborating to assess forward-looking climate transition risks in sovereign bonds

portfolios, considering scenarios of disorderly climate policy introductions
(Stalhandske, Z.; Steinmann, C.B.; Meiler, S.; Sauer, I.J.; Vogt, T.; Bresch, D.N.;
Kropf, C.M. (2024)). This evolution reflects a shift towards more comprehensive,
forward-looking, and integrated approaches to climate risk assessment in the
insurance sector. Leveraging climate insurance to mitigate risks associated with
climate change presents both challenges and opportunities. Challenges include
assessing future climate risks, promoting policyholder risk reduction, and supporting
resilient reinstatement (Arquint, N.; Berger, A. (2022)). Lack of accessibility,
increased risk for insurance providers, and ecological effects (Golnaraghi, M. (2023)).
Additionally, the warming and acidification of oceans pose threats to marine
ecosystems, such as coral reefs, necessitating innovative insurance products to protect
these valuable resources (Basu, A.; Yadav, M.K. (2023)).

6