Supporting actuaries with climate related analysis

Analysis

As part of the Life Climate working party, the insurance risk sub-group is looking at how to support actuaries with climate-related analysis in the context of insurance liabilities, and the impact on non-economic factors.

The emerging nature of climate change and the wide range of potential impacts means that this is an area of study with a great level of uncertainty and very complex multivariate interactions. It is also a new and unfamiliar area of study for actuaries. The sub-group aims to produce output that is genuinely helpful to practitioners and supports fellow actuaries’ analysis and study and therefore supports those furthering our collective understanding of the field. On a more personal note, the group members are keen to use their actuarial skills in a positive way to support efforts to address climate change.

That climate change can affect non-economic factors in the liability portion of the balance sheet can be quickly understood by qualitative reasoning. For example, changes in temperature, flooding, large movements of people, or extreme weather can all create circumstances that may impact mortality/longevity and morbidity. What is much more difficult is how to make any quantitative assessment of the impact. 

First steps

Our initial step was to survey readily available relevant publications and research articles covering aspects of the relationship between the effects of climate change (e.g. temperature change, flooding, droughts, air pollution) and death rates. The purpose of this was twofold:

  1. to begin a catalogue of information that will help fellow actuaries working in this area; and
  2. to gain an understanding of the type of information available and the challenges it presents.

The information catalogued will be combined with that gathered by the other sub-groups in the working party. This will create a point of reference for actuaries looking at climate change to enable them to find the information they are looking for more quickly, therefore, supporting them in their research.

So far

A few examples of the type of information we have found in the publications reviewed so far are:

  • High-level consideration of key climate change outcomes. For instance, the number of extreme temperature events investigated alongside numbers of excess deaths to determine how climate change has affected mortality recently.  These are then often projected forward to calculate the potential future impact of climate change. However, most insurance reports are lacking technical detail, perhaps due to the young nature of this field of study.
  • Global associations of insurers have provided frameworks for the risk’s insurers need to take particular note of and how they may go about quantifying the impact of climate change. These reports often note the lack of data and modelling expertise in the area and indeed, we’ve found a lack of insurance modelling specific reports.
  • Detailed research which investigates the impact of climate change on health and mortality from sources such as medical journals and the World Health Organisation. The research considers a range of factors contributing to mortality such as temperature changes, air pollution and drought - sometimes linked to specific causes of death such as certain cancers and lung disease. We have, however, found there to be little that bridges the gap from the medical to the actuarial and insurance context.  
  • Some regions have created indices relevant for climate change, such as the Actuaries Climate Index in America and Canada. It measures the observed changes in extreme weather and sea levels and is updated quarterly using meteorological data. The Australian Actuaries Climate Index and Singapore Actuarial Society Climate Index have also been set up to measure similar information. It appears that the UK and Europe have no such actuarial index, but there is plenty of evidence that European insurers have had to consider impacts on the liability side of the balance sheet.

Next

Our overarching aim is to produce output that is genuinely useful to other actuaries. To do this, we are developing a survey that has two goals:

  1. to gather information about the work currently being carried out by actuaries within the life industry that we can then share with IFoA members to support the development of best practice; and,
  2. to get input from you all as members on what you would find most useful to support you in your work.

We will use the survey output, combined with the information we have gathered from our survey of publications, to guide the direction of the sub-group to the working party.

The aim would be for this output to provide practical support for activities such as demographic basis setting and stress testing, and to help address some of the challenges the field presents, in particular:

  • newness: unlike other risks, actuaries have not had years of developing and refining techniques to model impact;
  • complexity: the potential impact of climate change is hugely complex, with highly uncertain impacts on a diverse set of interacting factors such as population displacement, pandemic risk, and weather changes; and,
  • data: as this is an emerging field, data collection is young and thus the data available for analysis is limited.

Look out for our regular blogs and let us know what we can produce to help support your work.