IAA.CLIMATE Flashcards
What are the challenges faced when doing scenario analysis for climate risk (3)
- climate scenarios provided by organizations such as IPCC lack specificity
- physical risk tend to develop over many years
- timing and impact of transition, legal and reputational risks are highly uncertain
What is physical risk
Physical risk is the risk on assets, businesses and operations arising from more frequent climate related phenomenon induced by climate change and their impacts on a firm’s ability to generate profit
How are general insurers exposed to physical risk (4)
CIAW
- claims on insured events
- investment values on their asset portfolios
- assessment of credit risk
- increased worker’s compensation claims due to higher mortality and morbidity at work (stress from working outdoors during heat waves,…)
Examples of physical risks (6)
- drought & bushfires (higher temperatures)
- agriculture & fisheries (rainfall pattern changes)
- flood (higher rainfall intensity)
- great barrier reef & tourism (coral bleaching)
- cyclones (more rainfall, flooding)
- coastal inundation & erosion (higher sea levels)
What is transition risk
the risk to a firm’s business due to the shift towards more sustainable and environmentally friendly operations
Actuarial considerations for transition risk include (3)
GNS
- NEW TECHNOLOGIES: such as electric and autonomous vehicles (and their effect on insurance pricing and product design)
- SHIFT IN INDUSTRY: that may require changes in products or coverages underwritten
- GROWTH AND CONTRACTION OF ECONOMIC SECTOR: that can affect the insurer’s premium revenue
What is liability risk
firm’s failure to address financial and strategic risks arising from climate change through mitigation, adaptation or disclosures (ex. D&O and Professional Indemnity contracts)
How can insurers mitigate excess loss from climate risk
- reprice or refuse policies annually
- recalibrate prices of natural hazards and product design using the latest science and experience
What do AA need to consider and should comment on for climate risk (3)
- leading indicators of climate change risks (should be reflected in pricing)
- regulatory and legal changes
- new products, products design and other industry developments
When modeling catastrophes, actuaries should consider (4/7)
CUACDAS or CUAS
- capturing climate related risks in underlying assumptions
- updating exposures in model
- allowing for factors other than damage (ex.: business interruption)
- consider non-linearity or step changes that impact climate risks
- develop scenarios and metrics to estimate transition and liability risk
- analyzing different time horizons
- segregating the effect of climate change by geography
When analyzing different time horizons, when can we use SHORT term time horizons and how can we adjust natural hazard catastrophe model with this time horizon
Applications: annual pricing and valuation
How to adjust natural hazard catastrophe model: use current climate-related risks with small annual increments
When analyzing different time horizons, when can we use MEDIUM term time horizons and how can we adjust natural hazard catastrophe model with this time horizon
Applications: portfolio steering
How to adjust natural hazard catastrophe model: sensitivity testing with trends in parameters
When analyzing different time horizons, when can we use LONG term time horizons and how can we adjust natural hazard catastrophe model with this time horizon
Applications: capital position, rebalancing business
How to adjust natural hazard catastrophe model: sensitivity testing under different climate scenarios
What is systems thinking
a tool
used to take into account the social, economic, political and technological environment
in which the firm operates
when considering how it will be affected by climate risk
Benefits of Systems thinking (2)
- assist firm with thinking of interconnectedness of the modern economy
- helps derives value for the variables needed to estimate impact of climate scenarios
