Climate Transition Risk Insurance: What Insurers, M&A Teams, and Investors Should Do Next

Introduction

transition and liability risks are now moving just as quickly into the core of solvency, asset-allocation and product strategy debates. For boards, M&A teams and investors, the key question has shifted from if climate transition risk will be priced into underwriting and capital requirements to how fast and through which channels.

Three structural signals anchor this report. First, weather-related disasters and economic losses have grown materially over recent decades, and only a fraction is insured—leaving a protection gap that represents both a social challenge and a revenue opportunity for the industry. Second, European supervisors are translating transition risks into concrete prudential proposals. EIOPA’s latest work introduces supplementary capital charges for fossil-fuel exposures—up to 17 percentage points on equities and up to 40% (multiplicative) for corporate bond spread risk—while noting the overall system-wide solvency impact is limited given current exposures. Third, insurers’ investment portfolios remain dominated by fixed income; the shift toward “green” allocation is visible but still small, implying both transition exposure and capital re-deployment potential.

Collectively, the data frame a market where transition rules and economics are tightening while protection needs are expanding. This creates a dual mandate: de-risk legacy balance sheets and underwrite the transition.

What “Climate Transition Risk Insurance” Covers—and Why It Matters Now

Transition risk captures policy, technology, market and reputational shifts that reprice carbon-intensive assets and business models. For insurers, it manifests across both sides of the balance sheet:

• Asset side: Changes in regulation, energy mix, and investor preferences can widen spreads or compress valuations for fossil-fuel producers and dependent industries. EIOPA’s empirical work shows a higher loss profile for fossil-fuel equities (backward-looking 56% VaR vs the 39% Type I equity charge) and proposes a supplementary equity charge up to 17 percentage points. For bonds, EIOPA finds the 99.5th percentile of spread changes for fossil-fuel bonds is roughly 88% higher than the market, motivating a supplementary bond charge capped at +40% multiplicative to standard spread shocks.

• Liability side: Transition policy accelerates the re-shaping of risk pools (e.g., EVs, renewable infrastructure, grid modernization) and creates new product needs (performance guarantees, carbon capture, clean-tech construction, supply-chain transition). UNEP’s “Insuring the net-zero transition” frames this as insurers supporting net-zero pathways while maintaining risk-based discipline.

Transition risk insurance is therefore not a single product; it is a portfolio of covers and financial solutions aligned to decarbonization milestones, with underwriting, pricing and capacity guided by scenario analysis and prudential constraints.

Market Context: Loss Trends and the Protection Gap

Loss trends and protection gaps continue to widen. Independent industry analysis documents an almost five-fold increase in the average number of weather-related disasters from the 1970s to the 2010s, underscoring the macro direction of tail events even before layering on transition dynamics.

In addition, only about 46% of global weather-related losses are insured, leaving a sizeable protection gap—estimated as a $71B annual revenue opportunity for insurers if capacity and resilience solutions scale effectively.

Europe offers a concrete example of the challenge. Supervisory dashboards indicate that only roughly 23% of total economic losses from extreme weather events are insured in Europe. Without stronger adaptation measures and product innovation, this gap is expected to widen as climate exposures grow and pricing becomes more challenging.

For carriers and investors, this context has two direct implications. First, capital deployment into resilience and adaptation solutions increases insurability over time and preserves market depth. Second, the transition opportunity set (new covers for clean-tech and infrastructure) expands as public policy and corporate targets accelerate.

Regulatory Trajectory: EIOPA’s Prudential Treatment of Transition Risks

EIOPA’s 2024 report on the prudential treatment of sustainability risks is a watershed for European carriers and any investor underwriting EU Solvency II balance sheets. The supervisory rationale is straightforward: empirical evidence suggests fossil-fuel-related assets have elevated loss profiles that are not yet fully internalized in the standard formula. The proposed policy options therefore introduce dedicated prudential treatment:

• Equities: A supplementary charge up to +17%-points for fossil-fuel equities, aligning capital to a backward-looking 56% VaR and forward-looking scenarios.

• Corporate bonds: A multiplicative cap up to +40% on spread shocks—e.g., a low-risk, 7-year, AAA-equivalent bond’s shock rising from 5.5% to 7.7%—informed by spread changes that are materially higher for fossil-fuel names at the 99.5th percentile.

Importantly, the system-wide solvency effect appears limited because direct fossil-fuel holdings are a small share of portfolios; country-level impact analysis for the +17% equity add-on shows changes in solvency ratios typically within ±2 percentage points, with most markets below that.

For M&A diligence, these proposals matter in three ways. First, they shift the capital intensity of any target’s asset book depending on fossil-fuel exposure. 

Second, they raise the bar for risk governance, data lineage and NACE code identification when isolating fossil-fuel assets. Third, they create valuation dispersion between portfolios with credible transition plans and those without—because future capital costs are path dependent on asset mix and transition strategy.

Transition Pathways and the Energy Mix

The transition is about economics, not just ideology. The EU’s decarbonization architecture (e.g., Fit-for-55) sets explicit targets for emissions, power generation and industry. The energy mix is expected to shift toward electricity and renewables over this decade, with declining relative shares for oil and gas and lower coal exposure.

For investors in insurance equities and debt, this shift converts into sectoral repricing and credit migration risk across power, industrials, transportation and real estate. For carriers, it maps to new exposures (e.g., grid stability, battery storage, wind component failure curves) and new product demand. Supervisory scenario analysis underlines that insurers’ portfolios are heavily skewed to fixed-income, creating a transmission channel from credit risk to solvency during abrupt transition repricing; at the same time, the share of green bonds in insurers’ corporate bond books, while rising, was about 5.7% by end-2023—small relative to the needed re-allocation.

Scenario Analysis and Capital Planning

Head office finance and CRO teams should steer with scenario-based capital planning. Fit-for-55 climate analysis provides a template approach: quantify sector-specific shocks, then trace through to portfolio losses and product-line sensitivities. The work shows how losses distribute across portfolio types—with unit-linked business absorbing a meaningful share for life insurers (roughly one-fifth to one-third in the scenarios examined) while defined-benefit pension portfolios carry the bulk of losses on their sponsors.

In parallel, supervisors emphasize forward-looking calibration and data granularity. For example, to implement an additional bond charge coherently across rating/tenor buckets—without breaking the standard-formula risk mapping—authorities favor a multiplicative approach, capped to avoid economically implausible capital levels. The message for CFOs and investors is clear: transition risk is measurable, and capital add-ons are being engineered to be both risk-sensitive and implementable.

Underwriting Opportunities: Turning Adaptation into Insurability

Transition is not only about divestment; it’s also about creating insurable risk via adaptation. Supervisors highlight impact underwriting—embedding adaptation measures (e.g., early-warning systems, flood doors, resilience standards) into policy design and pricing—to improve availability and affordability of cover over time. The current market is early stage, but the regulatory direction is to recognize prudentially when risk is actually reduced.

This is strategically aligned with the $71B annual revenue opportunity from narrowing the protection gap. Scaling will require public-private partnerships to expand penetration and deal with affordability in high-risk communities, along with better climate data and CAT models to price risk accurately and incentivize resilience investments.

For product leaders, the most immediate areas include:

• Transition-performance covers for renewable and grid assets (availability guarantees, output underperformance, component failure).

• Construction and project-completion covers tailored to clean-tech timelines and supply chains.

• Parametric solutions tied to transition milestones (e.g., temperature or wind thresholds for renewable assets) to improve liquidity post-event.

Each of these sits squarely within the risk-based, actuarial approach supervisors encourage and map to measurable reductions in expected loss when resilience measures are embedded.

Reinsurance and Capacity

Reinsurance market dynamics remain favorable for disciplined underwriters. Recent reporting shows that reinsurers improved underwriting performance, grew premiums and maintained robust solvency as markets hardened.

At the same time, reinsurers’ own transition plans are maturing. Large groups are publishing Climate Transition Plans and reporting progress against science-based targets and vendor decarbonization goals, with extensive research programs focused on adaptation economics and clean-energy risks. This alignment between primary carriers and global reinsurers is necessary to scale capacity into transition sectors while keeping portfolio carbon intensity on a credible path.

Investment Strategy: Tilt, Hedge, and Finance the Transition

On the asset side, transition risk management is chiefly about tilt and engagement, not blanket exclusion. The supervisory proposals implicitly reward portfolios that isolate and actively manage fossil-fuel exposures (e.g., shorter duration, stronger covenants, or financed phase-out strategies) while increasing allocation to green and taxonomy-aligned assets. Today’s starting point: insurers’ portfolios are dominated by fixed income; green bonds are growing but remain a single-digit share—about 5.7% of corporate bond holdings as of late-2023—leaving ample room to scale.

In practice, CIOs should consider:

• Credit migration screens that integrate transition scenarios into PD/LGD trajectories for energy and hard-to-abate sectors (steel, cement, aviation).

• Duration and convexity management tuned to possible spread re-sets in carbon-intensive names. The preferred multiplicative approach for bond charges communicates the direction of travel—more capital where empirical spread risk is higher.

• Use-of-proceeds and KPI-linked structures (green and sustainability-linked bonds) to finance credible transition plans and secure potential capital treatment benefits as regulation evolves.

For private markets, attention should focus on grid modernization, storage, and industrial electrification—all core to the energy-mix shift illustrated in Chart D—with risk participation structured through project, warranty, or performance insurance where appropriate.

Liability-Side Product Suite for the Transition

A practical taxonomy of transition-risk products for commercial lines includes:

• Energy transition construction/operational covers: bespoke CAR/EAR for renewable megaprojects and grid reinforcements; contingent business interruption for component supply chains.

• Technology performance & warranty insurance: for wind turbine availability, battery storage degradation, electrolyzer output, and CCUS capture rates; structures can be combined with reinsurance or capital-markets capacity.

• Corporate transition liability: D&O and professional indemnity with enhanced climate-disclosure and transition-plan wording; careful scenario stress to avoid anti-selection.

• Parametric or index-based products: to improve speed of recovery for climate-sensitive sectors and regions; these can complement impact-underwriting programs that reward resilience measures.

These offerings should be supported by data partnerships and public-sector engagement to scale penetration.

Pricing, Modeling and Data: Getting Technical

Transition risk modeling must combine macro-policy scenarios, sectoral technology curves, and micro-exposure data:

• Macro scenarios: Use policy-consistent pathways (e.g., EU Fit-for-55) for carbon price, power mix and industrial abatement timing. The expected rise of electricity’s share in the energy mix and the decline in fossil share (Chart D) provide key priors for loss-cost trends and asset repricing.

• Sector/technology curves: Source failure and performance curves for wind, solar, batteries, hydrogen and grid components; link to underwriting limits and exclusions to avoid accumulation surprises.

• Micro-exposure and resilience data: Regulators encourage capturing adaptation benefits in underwriting pools; case studies show CAT-model conditioning and resilience assumptions (e.g., flood defenses) change AAL and RP loss materially—exactly the levers needed for impact underwriting.

Carriers that can evidence loss-reducing adaptations should advocate for prudential recognition as the framework evolves—consistent with supervisory direction of travel.

Strategy for Corporate Development and M&A

For M&A teams and investors, climate transition risk is now a pricing variable in deal models:

• Portfolio mix matters. Targets with concentrated fossil-fuel holdings (direct or through funds) will carry higher capital intensity under the proposed EIOPA charges; diligence should isolate exposures and test solvency sensitivity to +17% equity and +40% bond add-ons.

• Underwriting edge is defensible value. Platforms with demonstrated impact-underwriting capability and data pipelines for adaptation benefits will have sustainable pricing power as CAT incidence and protection gaps grow.

• Reinsurance relationships are strategic. Groups with access to reinsurers that publish credible transition plans and research have an advantage in scaling new products and securing affordable capacity.

• Revenue synergies exist. Closing protection gaps presents real top-line opportunity; in developed markets this often requires public-private constructs and community-level resilience financing to preserve affordability.

In short, acquirers should pay a premium for transition-ready balance sheets and operating models: credible asset tilt, product innovation roadmaps, and public-sector partnership muscles.

Practical Roadmap for Insurers

1. Codify transition governance. Map exposures (assets and liabilities) to transition drivers and set clear risk appetite for high-carbon sectors. Ensure data systems can isolate fossil-fuel assets down to NACE codes to support future prudential reporting.

2. Run solvency sensitivities now. Quantify the impact of +17% equity and +40% bond add-ons across group entities. Impact assessments suggest system-wide effects are limited today, but portfolio dispersion can be material at the entity level.

3. Scale green allocation with guardrails. Use a pacing plan to lift green bond exposure above today’s low single-digit starting point while maintaining ALM and credit-quality discipline.

4. Build an impact-underwriting franchise. Incorporate adaptation measures into policy terms and pricing, and collect evidence of loss reduction to advocate for prudential recognition over time.

5. Engage reinsurers and the public sector early. Use PPPs to extend penetration and keep cover affordable in high-risk geographies, supported by improved data and modeling standards.

6. Develop a transition-product suite. Prioritize energy-infrastructure, technology performance, and parametric solutions—areas where demand is rising and expertise creates moat.

The Investor’s Lens

For equity and credit investors in insurance groups, climate transition risk rewires valuation, growth and capital narratives:

• Capital intensity differential. Groups with low fossil-fuel asset exposure and clearer green allocation pathways should trade at a lower cost of capital under the proposed rules. Conversely, portfolios with concentrated exposure will face a capital drag and higher volatility under transition scenarios.

• Growth embedded in resilience. The industry can grow by closing the protection gap, especially through PPPs and impact underwriting—a source of both revenue and social value.

• Earnings quality via reinsurance. Accretive reinsurance relationships and credible transition plans at group level reduce tail risk and stabilize earnings trajectories.

For event-driven and M&A-oriented investors, diligence should stress transition solvency impacts, underwriting capability, and partnership ecosystems—differentiators that will drive multiple expansion as regulation tightens.

Conclusion

The climate transition is now actionable risk and investable opportunity for the insurance sector. On the risk side, supervisors are converging on explicit prudential treatment of fossil-fuel exposures—+17% for equities and up to +40% on bond spread shocks—while encouraging insurers to demonstrate forward-looking, data-driven risk management. On the opportunity side, protection gaps remain large and growing; impact-underwriting and public-private constructs can restore insurability and unlock revenue, particularly as economies re-wire toward electrification and renewables.

For insurers, the mandate is to tilt portfolios, codify transition governance, and industrialize adaptation-linked products with reinsurer and public-sector partners. For insurance M&A developers, focus on transition-ready targets with clean asset books and demonstrable underwriting edge; build valuation cases on solvency resilience and growth from protection-gap plays. For investors, allocate to carriers with credible transition plans and capacity to finance the shift in the energy mix and industrial base—because that is where the earnings quality and capital efficiency will concentrate as the decade progresses.

Sources & References

European Insurance and Occupation Pension Authority. (2024). Fit-for-55 climate scenario analysis. https://www.eiopa.europa.eu/document/download/6a90e0a7-135e-41f0-af69-22065a0bf8cd_en?filename=Report%20on%20fit%20for%2055%20climate%20scenario%20analysis.pdf 

European Insurance and Occupation Pension Authority. (2024). Prudential Treatment of Sustainability Risks. https://www.eiopa.europa.eu/document/download/036a149c-bc74-4138-ae1b-40662b7d5914_en?filename=EIOPA-BoS-24-372+-+Report+on+the+Prudential+Treatment+of+Sustainability+Risks.pdf 

Marsh McLennan. Building a climate resilient future. Five priorities for the global insurance industry. https://www.marshmclennan.com/assets/insights/publications/2023/december/2023-marsh-mcLennan-building-a-climate-resilient-future.pdf

SwissRE. (2025).  Swiss Re’s Climate Transition Plan. https://www.swissre.com/dam/jcr%3A82425314-06b8-4db4-af17-8cec486a5592/2024-sustainability-report-slides-CTP-extract-en.pdf 

The Geneva Association. (2021). Climate Change Risk Assessment for the Insurance Industry. A holistic decision-making framework and key considerations for both sides of the balance sheet. https://www.genevaassociation.org/sites/default/files/climate_risk_web_final_250221.pdf 

UN. (2022). Insuring the net-zero transition: Evolving thinking and practices. https://www.unepfi.org/wordpress/wp-content/uploads/2022/04/Insuring-the-net-zero-transition.pdf