IAA.Climate

Question 1

Identify the 3 challenges faced in scenario analysis for climate risk.

Answer 1

1. Climate scenarios provided by organization such as IPCC lack specificity
2. Physical climate risks develop over a long period
3. High uncertainty in impact of transition, legal & reputation climate risk

Question 2

Define Physical Risk

Answer 2

Risk on assets, businesses & operations arising from frequent related phenomenon induced by climate change & their impacts on a firm’s ability to generate profit.

Ex: increased floods, cyclones, droughts, wildfire

Question 3

Identify the 4 main effects of physical risk

Answer 3

1. Increased Property claims
2. Impact on investment values
3. Impact on credit risk
4. Higher workers compensation claims

Question 4

Define Transition Risk

Answer 4

Risk to a firm’s business due to a shift toward more sustainable & environmentally friendly operations.

Ex: New tech such as EV, Increased carbon prices.

Question 5

Identify 2 ways insurers can mitigate climate risk

Answer 5

1. Reprice or refuse policies annually
2. Recalibrate prices of natural hazards & product design using latest science.

Question 6

Identify 3 considerations for climate risk

Answer 6

1. Leading indicators that lead to climate change
2. Regulatory & legal changes
3. New products, products design & other industry development

Question 7

Define systems thinking

Answer 7

Tool used to consider how the SEPT environment in which the firm operates will be affected by a climate change

(social, economic, political & technological)

Question 8

Identify 2 benefits of systems thinking

Answer 8

1. Assist firm with thinking of the interconnectedness of the modern economy
2. Helps derive values for the variables needed to estimate impact of climate scenarios

Question 9

Identify 4 considerations in modelling catastrophes

(Hint: CUDACAS)

Answer 9

1. Capture climate risk in underlying assumptions
2. Update exposures in model
3. Develop scenarios to estimate transition risk
4. Allow for demand surge & business interruption
5. Consider non-linearity of climate impacts
6. Analyze different time horizons
7. Segregate effects of climate change by geography

Question 10

Briefly explain the short-term, medium-term & long-term time horizon considerations

Answer 10

Short: Used for pricing & valuation
Use current climate risk with small increments

Medium: Portfolio steering
Do sensitivity testing with trends in the parameters

Long: Capital position & rebalancing business
Sensitivity testing under different scenarios

Question 11

Define explanatory scenarios

Answer 11

Used to explore a range of scenarios

Test strategies for climate change

Question 12

Define narrative scenarios

Answer 12

Future outcomes are set from plotted pathways

Used to assess targets & implementation plans

Ex: Reverse stress-testing

Question 13

Define scenario storylines

Answer 13

Scenario analysis link historical & present events with hypothetical futures by describing:
1. Causal pathways & drivers
2. Assumptions
3. Affected systems

Question 14

identify 4 considerations when using IPCC reports for scenario analysis

Answer 14

1. Implicit assumptions that financial markets, healthcare systems, supply chains & communications will function at required level
2. Inherent assumptions used in modelling of Assets & Liabilities
3. Sequencing, correlations & cascading effects
4. Paths & impacts of climate-related risks to critical infrastructure to determine resilience
5. A&L correlation
6. Actions by one firm to address climate risk may create risk for another