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Climate Change and Life Insurance: Yes, but How?

David FordIFoA member David Ford, introduces the new practical guide to help actuaries working in Life Insurance consider the impact of climate change.

We are living in a time when the issue of climate change barely leaves the news agenda. Just to take a day in early November, one of the key news stories focussed on a report on climate change published in BioScience where 11,000 scientists warned of a climate emergency. Here in the UK, another news story detailed a High Court case relating to Extinction Rebellion. One way or another climate change is a key media topic and public interest area.

Currently too, the effects of extreme weather events can be seen in UK flooding and Australian bushfires. Whether individual short term weather events can be mapped to longer term climate change or not, the consequences of extreme weather events for general insurance claims are clear. And this leads to wanting to consider how climate change might affect future extremes. 

But what about life insurance? How does climate change bear upon life actuaries’ day to day work? How can we incorporate climate change considerations? In the ‘Practical Guide to Climate Change for Life Actuaries’ just published, we’ve produced a document that sits alongside other IFOA guides on climate change: one for all actuaries and others for other disciplines (general insurance and pensions, with investments to follow).

We need to start by thinking about the possible areas of climate change impact and then linking them through to life insurance. There are many uncertainties here. Whilst the scientific consensus is that climate change associated with global warming is in progress, what is the possible scale or timing of its impacts? How will society respond to climate change to reduce or mitigate the impacts? What will the ultimate effectiveness of society’s responses be? 

What we can do is consider the areas of impact most relevant to life insurance. In the guide, we’ve looked at how climate change is categorised (the typical split being its implications for ‘Physical’, ‘Transition’ and ‘Liability’ risks). Climate change could give rise to impacts on health and mortality, physical assets, and financial markets. We’ve looked to link this to life insurance actuarial roles.

Whilst there is research and modelling available for the potential impact of climate change on measures such as global temperatures and sea levels, these don’t directly provide inputs to life insurance financial models. Detailed financial projections may be spurious. But reflecting the uncertainty and considering ranges of possible outcomes is not. In the guide, we therefore propose approaches and frameworks to more directly link climate change considerations into typical insurance ERM frameworks, including looking to map the physical/transition/liability categorisation into a more traditional risk-based capital type categorisation.

Large, global insurers are making good progress in climate change considerations particularly in relation to investment. For smaller firms and across other areas, quantitative understanding of the potential impact of climate change is developing, and actuaries should keep aware of and support developments here. Even where quantification isn’t yet possible, initial steps can be taken. These involve accepting and recognising climate change as a source of risk and beginning to identify the specific risks that can emerge. Qualitative scenarios can be useful for exploring different possible futures even before there is sufficient data or confidence for quantitative approaches. 

Both regulation and disclosure can affect life actuaries’ work. Globally, regulators and advisory bodies are developing frameworks and regulation aimed at monitoring, measuring, and managing the emerging risks of climate change. In the UK, the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA) are active here; both have published consultation papers with follow up Supervisory Statements and Feedback Statements setting out expectations of firms and planned future engagement. They have created the joint regulatory Climate Financial Risk Forum. Disclosure is emerging as an important component of the response to the risks of climate change, seeking to inform investors and consumers on companies’ approaches to these risks.

We encourage life actuaries to consider how the impacts and effects of climate change are applicable to their own work, and to their employer. Recognising the implications of climate change risk in business operations is a key first step. Engaging internally with exercises such as scenario analysis, allowing for climate change effects in business planning, may provide greater insight into the specific risks a company faces. Achieving cross-disciplinary and wider firm engagement will be essential in embedding a consideration of climate change in strategic decision making, and, ultimately, including climate change risk in more quantitative and robust risk management processes. Finally, across all of these aspects, actuaries and firms need to reflect on the need for disclosures around climate change related aspects.