Climate Flashcards
what are the challenges faced when doing scenario analysis for climate risks
- climate scenarios provided by organizations such as the IPCCA lack specificity
- timing over which physical climate risks develop are over a long period
- high uncertainty in impact of transition, legal and reputational climate risk
what is physical risk
physical risk is the risk on assets, businesses and operations arising from more frequent climate related phnomenon included by climate change and their impacts on a firm’s ability to generate profit
what are the main effects of physical risk
- increased property claims
- may increase or decrease investment values
- effects credit risk
- higher workers comp claims
examples of physical risks
increased floods, cyclones, droughts, wildfire
what is transition risk
transition risk is the risk to a firm’s business due to the shift towards more sustainable and environmentally friendly operations
examples of transition risk
- new technologies such as EV
- increased carbon prices
how can insurers mitigate climate risk
- reprice or refuse policies annually
- recalibrate prices of natural hazards and product design using the latest science
what do actuaries need to consider for climate risk
- leading indicators that leads to climate change
- regulatory and legal changes
- new products, product design and other industry developments
modelling catastrophes considerations
(CLIMATE):
- capture climate related risk in underlying assumptions
- consider non-linear or step changes that impact climate risks
- allowing for factors other than damage (demand surge & business interruption)
- analyzing different time horizon
- segregating the effect of climate change by geography
- develop scenario and metrics to estimate transition and liability risk
- updating exposures in the model
short-term time horizon considerations
used for pricing and valuation, use current climate risk with small increments
medium-term time horizon considerations
portfolio steering, do sensitivity testing with trends in the parameters
long-term time horizon considerations
capital position and rebalancing business, sensitivity testing under different scenarios
what is system thinking
a tool used to take the social, economic, political and technological environment in which the firm operates and consider how it will be affected by climate change
benefits of system thinking
- assists firm with thinking of the interconnectedness of the modern economy
- helps derive values for the variables needed estimate impact of climate scenarios
what are exploratory scenarios
- used to explore a range of scenarios
- test strategies for climate change
what are normative scenarios
- future outcomes are set from plotted pathways
- used to assess targets and implementation plans
- reverse stress testing
considerations when using IPCC reports for scenario analysis
(FCAS-CIA):
- assumption that financial markets, supply chains and communication will be functioning
- correlation between assets and liabilities
- action by one firm may create risk for another
- sequencing, correlation, and cascading of effects
- paths and impacts of climate risk on critical infrastructure
- assumptions in the modelling approach used to estimate assets and liabilities
what are scenario storylines
scenario storylines link historical and present events with hypothetical futures by describing causal pathways and drivers, assumptions and affected systems
