Climate Change and Actuaries, A 2006 article, still follows.

[Mayank GoyalKeymaster]

Climate change and actuaries

Whenever you open a newspaper

or turn on a TV these

days, it’s not long before

you find some reference to

global warming. You might therefore feel you

have had enough of the subject. However, in

our role as long-term risk managers climate

change may have a considerable impact on our

work, and at the very least we need to be able

to answer clients’ questions on the issue. The

forthcoming sessional meeting on 26 November

will aim to reach a consensus on what that

impact might be and how it can be managed.

The meeting will be based on a questionnaire

sent to members, seeking their opinions. Guest

speakers will lead discussions based on those

questions to explore the impact of climate

change on different areas of practice. The discussion

will be proceeded by a short talk by Professor

Leonard Smith on what the latest science

means for actuaries, and where information can

be found to answer questions we might ask: for

example, how might increased temperatures

affect mortality?

There is now universal consensus that the

world is warming up and will continue to do so

in future even the so-called sceptics agree on

this (they are sceptical about the cause). However,

the impact on society and the economy is

subject to a great deal of uncertainty. We need

to ascertain the risks, what they are, the degree

of uncertainty, the potential magnitude, and

the timeframe.

Why would a gradual increase in the global

temperature affect our work? First, it is predicted

that this increase will lead to more natural

extreme events such as tropical cyclones and

temporal floods. Second, water shortages in

many parts of the world are likely to be exacerbated

(for example, owing to the increase in size

of Hadley cells and the melting of Himalayan

glaciers), which could cause severe political and economic turmoil. Sea levels are rising slowly

because of thermohalic expansion, which in

itself can greatly magnify storm surges. However,

the latest science indicates that there could

be a rapid collapse of the Greenland and Antarctic

ice sheets, which would lead to much more

rapid rises, the consequences of which do not

need elucidation. The most authoritative source

on the economic consequence of climate

change is the HM Treasury’s Stern Review (2006),

which I recommend anyone interested to read.

The headline conclusion of the review is that

climate change could reduce global GDP by

20%. Research published subsequently has suggested

that the impact could be much greater,

owing to positive feedback such as the ‘albedo

flip’ (the Arctic Ocean absorbs rather than

reflects heat after the icecap has melted).

Climate change in practice

In the meeting we shall discuss how climate

change affects individual areas of practice, for

example:

? Investment Increased natural hazards are

likely to have a direct impact on property and

certain classes of equity. Other classes may be

affected by increased regulation (for example,

airlines, electric utilities, and large power

users), while some companies (such as the oil

majors) might face damage to their reputation

and legal action. The macro disruptions

described above may cause economic disruption

that could affect assets in general.

? General insurance An increase in the frequency

and intensity of natural hazards could

cause increased property claims. Increased

claims may increase cost capital and affect

insurers’ reputations. The inevitable redlining

and increased premiums may reduce

new business. This could happen simultaneously

with the negative impact on company’s

investments described above.

? Life/health insurance A changing climate will

have possibly unknowable impacts on mortality

and morbidity. Some diseases will

become more prevalent, with others reducing.

? Pensions As has been described, mortality

may be affected as will the underlying investments.

The general economic impact should

affect assumptions. The long-term horizons

make pension funds particularly susceptible.

Risks that are known can be managed the

question is how? There are three possible

answers: first, climate change will have no

impact at all; second, it might have an impact

but it will be no different from other risk categories;

third, the aggregation of risk caused by

climate change represents a unique risk that will

require new risk management solutions. My

own view is that all three answers might be

correct, depending on the circumstances. For

example, a general insurance company writing

product liability could be totally unaffected,

and could therefore ignore climate change.

Health insurers might wish to monitor new diseases

and their predicted increased prevalence

but use traditional techniques to manage the

risk. A reinsurance company or insurer of holiday

properties may face aggregation of risk, and

would need to consider innovative risk management

tools.

Finally, climate change represents an impact on

the future wellbeing of society. Perhaps the most

important question is: do we wish to use our

influence, through the assets that pension funds

hold or over insurance policyholders, to affect

behaviour and bring about increased awareness

and mitigation of this serious problem?

Reference

HM Treasury (2006), Stern Review on the

Economics of Climate Change, available online at:

http://www.hm-treasury.gov.uk/independent_reviews

/stern_review_economics_climate_change

/sternreview_index.cfm

Source: http://www.theactuary.com/archive/old-articles/part-6/climate-change-and-actuaries/

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