Climate change is the global phenomenon of climate transformation resulting in large scale implications in our weather pattern. Melting of glaciers, rise in sea level, insect outbreaks, wildfires, experiencing monsoons during summer season are some of the adverse impacts of climate change. We have changed our attitude towards climate change from disbelief to disinterest to acknowledgment and then finally to active involvement. This article will provide us with evidence, implications and response to the climate change from an actuarial perspective.
- The planet’s average surface temperature has risen about 2.05 degrees Fahrenheit since the late 19th century. This change is due the the large amount of green house gases release in the atmosphere.
- Global sea level rose around 8 inches in the last century. The rate of increase in sea level more than double that of the last century.
- Increase in number of extreme events such as floods, wildfires etc.
Impact on ecosystem:
- Greater risk of extreme events and disasters such as cyclones, floods, drought. Extreme events are supposed to be of low frequency and high severity but due to climate change we are becoming more prone to them.
- Climate change disrupts our economy and affects agriculture and thereby many livelihoods. For a country like India, where agriculture is the backbone of economy, it has major implications.
- It has negative effect on the mortality rates of human beings and increases the rate of morbidity.
- There is water scarcity over the 21st century resulting in bad quality of water supplied.
Implications for Insurance Industry:
- Insurance is increasingly becoming less affordable due to greater probability of event occurring.
- Due to climate changes, increase in severity and frequency of extreme events, requires change in modelling and in all aspects of business such as reserves, pricing etc.
- Liability claims relating to climate change could emerge with some latency.
- Events that are usually uncorrelated may become more correlated due to climate change. Over and above, these correlation might be difficult to calculate and could contribute to greater risk.
- Climate change would change the mortality and morbidity rates of human, thus, impacting the pricing and valuation of a policy.
Response of Insurance Industry:
- Microinsurance: Low income population is particularly vulnerable to the effects of climate change. Microinsurance provides cover for these people. It either provides full cover for low valued assets or may also provide compensation for them.
- Weather based insurance index : Many livelihoods are dependent on the weather for income. For example, the losses of farmer due to drought can be covered under drought based insurance index. This covers the loss of farmers and thus is a better option of risk against climate change.
- Government Backed Insurance Schemes: In some developed countries, some risks have become uninsurable. The government has introduced insurance scheme to cover the risk for those exposed.
Next step for actuary towards climate change:
- Engage: Climate change is an actuarial problem and thus the issue should be proactively raised with clients and stakeholders. Climate change risks should be talked about.
- Improve governance: Help clients and stakeholders improve their governance and set up a framework where decisions can be made quickly and effectively.
- CSR responsibility: Contribution towards a better environment should be made to reduce the risks of climate change.
- Quantify: Help clients and stakeholders quantifying qualitative risks to improve understanding.
Climate change can have many adverse impacts for both environment and economy. An actuary can quantify the risks exposing the severity of climate change. Institute and faculty of Actuaries has a Climate Change Working Party working for this cause. There is an Actuaries Climate Index (https://actuariesclimateindex.org/home/) which inform actuaries, public policymakers, and the general public about climate trends and some of the potential impacts of a changing climate on the United States and Canada.
The 2nd part of this article will include the financial instruments and initiatives that are in the market for risk management of climate change.
This article is written and published by Vitthal Goel