As extreme weather events linked to climate change are increasing, so is the impact on human lives, society and business. The Insurance Sector may feel the direct and indirect impact of climate change and so it is in our interest to understand the implications, to find out ways of absorbing the catastrophe costs and to come up with appropriate climate models to assess its impact on claim costs.
Actuaries are well-positioned to add value to the study of climate change and its potential socioeconomic impact. The actuary’s quantitative and analytical skills, along with an understanding of economic and financial processes, provide a basis for better measuring and evaluating the risks posed by climate change.
Thus, we cannot afford to ignore climate change and its impacts.
In this article, we will mainly be focusing on climate change’s impact on home insurance.
Now, let us first understand the reasons why we are discussing the impact on home insurance owing to climate change.
· Climate change has a potential to significantly impact natural perils and thus, home insurance. Also, there are evidences of it already impacting natural perils and claims cost.
· It involves high uncertainty which may possibly lead to a wide variety of outcomes including some sudden and extreme ones.
· Geographical location will play a key role. The impact will vary significantly depending upon the location and it may lead to affordability issues for home insurance. Risk prone areas will be charged higher premiums.
What can actuaries do?
· Understand and interpret changes in climate science and its impact on claims cost and develop appropriate climate models.
· Adjust premiums and manage the risks arising
· Implement effective mitigation schemes for the worst affected regions with the help of insurers and governments.
· Charging higher premiums to combat the impact of climate change will lead to potential reputational and political risks. Actuaries can assist insurers in addressing these issues.
· The insurers might have to revise the capital structure and reinsurance schemes to face the sudden and extreme changes that may occur in near future. Thus, the actuaries have to consider the implications of cost of capital as well as reinsurance.
· Communicate all of the above to the board without under or over stating the impact or risk.
Carbon emissions, global temperature and other predictions along the severity and frequency of different types of natural perils losses will affect the home insurance pricing.
A research paper was prepared and submitted to The Actuaries Institute where they collaborated with climate science experts, assessed the impacts and highlighted areas where it required further research. All of that will be discussed in the articles to follow up.
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