C48 IAA CLIMATE

Climate → Physical Risks & its impacts

• Cyclone

  • More rain & flooding

  • Need cyclone-resilient building codes

• Bushfires

  • Higher temp

  • Changing sev & freq

• Flood

  • More intense rainfall

  • Urban drainage become ineffective

How do physical risks affect Work Comp?

Climate affects mortality & morbidity at work

• Ex: heat stress from working outdoors in heat wave

Climate → Considerations for Transition Risks

• New tech → electric & autonomous cars

  • Effect on insurance pricing & product design

• Shifts in types of industries that may require changes in products/covgs

• Growth & contraction of economic sectors can affect prem revenue

Climate → Liability Risks

• From Directors & Officers, Professional Indemnity contracts

• Due to failure to address financial & strategic risks thru mitigation, adaptation, or disclosure

How to mitigate excess loss from climate risk

• Reprice / refuse to renew policies

• Frequently recalibrate natural hazard prices & product design using latest science

Climate Risk → Actuary should be aware of:

• Affordability / availability issues

  • Reputational risk when inc prem

• Leading indicators that prompt pricing to reflect climate chg risks

• Legal changes that can emerge rapidly

• New products & industry developments

Considerations when adjusting Natural Hazard Cat Model

CAUSA

• Capture climate risks in underlying assumptions

• Allow for factors other than damage

• Update exposures in model to current state

• Segregate climate chg effects by geographical area

• Analyze diff time horizons

Time Horizons → Application & How to adjust Cat Model

Short Term

• Annual pricing & valuation

• Use current climate risks w/ small annual increments

Medium Term

• Portfolio steering

• Sensitivity testing w/ trend or step chg in parameters

Long Term

• Capital position

• Sensitivity testing under diff climate scenarios

Systems Thinking

Considers broader view of entire system when considering impact of climate risk

• Framework for scenario analysis

Scenario Analysis → 2 Scenarios

Exploratory

• Explores range of plausible scenarios

• Tests strategies for resilience

• Ex: stress tests

Normative

• Future outcomes set from plotted pathways

• Used w/ assessment of target & implementation plans

• Ex: reverse stress testing

Climate Risk Scenario Analysis → Considerations

• Inherent assumptions used in modelling of assets & liabilities

• Asset & liability correlation

• Importance of sequencing, correlation, & cascading of effects

• Climate chg actions by one firm may create risk for another

Ex of action by one firm to address climate risk that creates risk for another

• More frequent cat events

• Insurer raise price

• Adversely affects mortgage lenders

  • Borrowers can’t repay loan

Scenario Storyline

Link historical & present events w/ hypothetical futures

• Describes causal pathways, drivers, assumptions, affected systems

Systems Thinking in scenario analysis

Exploratory Scenario → resilience testing

Normative Scenario → plotting causal pathways

Theory of Fragility

• Systems that are occasionally stressed become resilient

• Systems that suppress volatility become fragile

Challenges unique to modeling Climate Risks

• Climate scenarios provided by UN lack specificity needed by actuaries

• Hard to determine time horizons