Climate Risks Becoming Part of Actuarial Thinking

This article originally appeared in the CIA (e)Bulletin.

By Gaetano Geretto, FCIA

The mandate of the CIA’s Climate Change and Sustainability Committee (CCSC) (log in required) is to raise awareness of climate change and environmental sustainability within and outside the profession, and to help the Canadian actuarial profession play a meaningful role in addressing these global challenges, both in providing advice to clients and related stakeholders, as well as offering input on public policy.

An increasing body of evidence demonstrates that climate-related issues represent a material risk to future economic stability affecting environmental, societal, and governance matters. The impact of these new emerging risks on economic and demographic assumptions used by actuaries is pervasive and may affect all areas of practice.

Climate Risks

Climate risks arise from multiple sources and entail a high degree of uncertainty both in terms of scope and timeline since the deadline to meet climate change reduction targets is becoming more immediate.

Climate risks comprise many factors including the following:

  • Physical risks arising from extreme climate events;
  • Transition risks associated with mitigation and adaptation initiatives;
  • Regulatory risks, including actions mandated by governments;
  • Liability risks as third parties may seek compensation for related damages; and
  • Timing and economic impacts of changes in lifestyles and business models resulting from the migration to a low-carbon economy.

Climate Change and Actuarial Practice

The CCSC has made available information on the CIA website (see below for additional details) and is of the opinion that CIA members need to access that information on a timely basis. Actuaries late in becoming aware of these emerging risks could suffer irreparable reputational damage and put the credibility of the profession at risk. A proactive approach is considered prudent and necessary given our status as a self-governing profession. Thus, the CCSC will recommend the prompt addition of an educational note applicable to all members reading as follows:

Actuaries would ensure that they are aware of and understand new emerging climate-related risks, and are clearly communicating the extent to which they have taken these risks into account in any relevant actuarial work, such as recommendations, decisions, pricing, valuation, estimation, etc.

The educational note would aim to make sure each member is responsible for the dynamic process of continuously updating the necessary knowledge base to maintain the quality of professional services.

Disclosure of Material Climate-Related Risks

Such guidance is in the public interest and would support the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) established under the auspices of the Financial Stability Board to develop a consistent approach to disclosures of material climate-related risks for companies when providing information to lenders, insurers, investors, and other stakeholders. Globally, more and more users of actuarial services are choosing to comply with TCFD recommendations and to apply environmental, social, and governance (ESG) principles.

The CCSC is just starting its work on developing guidance for Institute members, and we welcome comments from our colleagues on the topic.

Climate Change Resources

For those of you who may not have investigated the topic of climate change, the CCSC has published a research report entitled Climate Change and Resource Sustainability: An Overview for Actuaries, and made a number of presentations at meetings, seminars, or other activities which are accessible to all members. This material includes information on climate risks, mitigation, and adaptation initiatives.

Reference material is available on the CIA website under the Climate Change and Sustainability Resources section. In addition, members should be aware that information about the frequency of extreme weather events is available through the Actuaries Climate Index (ACI) with data updated on a quarterly/seasonal basis.

This article reflects the opinion of the author and does not represent an official statement of the CIA.

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