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

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29 Jun 2018, 22:33

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
? 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
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?
HM Treasury (2006), Stern Review on the
Economics of Climate Change, available online at:

Source: ... actuaries/

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Mayank Goyal

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