climate change risk: an actuarial approach
TRANSCRIPT
3 May 2023
Climate change risk: an actuarial approach
Nico Aspinall FIA, Chair, Resource and Environment Board, Institute and Faculty of Actuaries
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Topics
Introduce the Actuarial Risk Principles
Reminder of climate change
Use them to outline climate risk
Discuss the actuarial role
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
What is a risk?Risk = distribution of potential outcomes
0 20 40 60 80 100 1200
0.005
0.01
0.015
0.02
0.025
0.03
0.035
Loss (£m)
Prob
abili
ty D
ensi
ty
Expected cost is not the same as risk
Opportunity Risk
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
What is a risk?
The future is uncertain
How do we decide what to worry about?
How do we decide how much to worry?
The Actuarial Risk Principles provide a process to answer those questions
3 May 2023
Actuarial risk management cycle
Clearly communicated
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Risk context
Risk perception is subjective, and different for all stakeholders
Data Opinion
Model
“Everything must be made as simple as possible, but not one bit simpler.”
Attributed to Albert Einstein
3 May 2023
Describe the system
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
0 20 40 60 80 100 1200
0.005
0.01
0.015
0.02
0.025
0.03
0.035
Loss (£m)
Prob
abili
ty D
ensi
ty
Measure the risk
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Manage the risk
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Repeat the process
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Climate change risk
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Just in case you weren’t aware
IPCC AR5: Fig 1.03-01
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Just in case you weren’t aware
IPCC AR5: Fig 1.10-01
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Just in case you weren’t aware
IPCC AR5: Box 2.2 Fig 1-01
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Just in case you weren’t aware
IPCC AR5: Fig 2.08-01 – excluded seas level rises
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Just in case you weren’t aware
If:1. Countries come up with voluntary reduction plans (NDCs)
which together add up to the 2oC scenario; and2. They actually implement them
We have a 50% chance of avoiding greater than 2oC of warming – catastrophic effects.
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Back to the risk principles
Trustees
AssetsMembers
SponsorGovernment / regulators
We need to be net zero
carbon by 2050
We need you to produce a return over x
years
Is climate change
relevant to what we do?
We want our pension to be
paid
Who should we listen to?
Risk contextPensions example
We need to maintain financial stability
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
What level of impact can you survive?
Source: http://globalchallenges.org/publications/globalrisks/about-the-project/
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Risk context
What level of confidence do you need to have that you are not threatened by climate risk?• Insurance company funding at very high “probability” of
solvency (eg low probability of extreme impact)
• Pension scheme funding more aggressive
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Describe the system
You can’t prevent climate change
You can reduce its severity, and plan for the consequences
Mark Carney described:
– Physical risks– Liability risks – Transition risks
A useful frame to discuss climate risk and your preparedness.
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Physical risks
Physical risks: the impacts today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade.
Where are your assets?– Sea level rises– Windstorms– Drought
Can you move your assets?
Can you protect your assets?
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Liability risks
Liability risks: the impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible. Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest.
• How much have you contributed to Climate Change?
• How much will you contribute?
• Are you reserving for third party claims?
• What is your plan for becoming a net zero emitter?
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Transition risks
Transition risks: the financial risks which could result from the process of adjustment towards a lower-carbon economy. Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.
• What do you have to do to green / protect your business?
• How quickly can you do this?
• Do you believe climate risk is priced into asset values?
• Can you react quickly enough to a change in sentiment?
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Measure the risk
Source: Source: IPCC 2007 4th Assessment Report, Working Group 1 (Figure 9-20-1)
Equilibrium Climate Sensitivity is very hard,
maybe impossible to estimate
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Measure the risk
The Actuaries Climate Index (ACI) measures extreme
weather (High temperatures, Low temperatures, Extreme precipitation, Drought, High
winds, Sea level) as deviation from baseline
period 1961 – 1990.
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Measure the risk
Assessing physical risk is hard, but you can make a start.
Assessing transition risk takes views (e.g. we can value assets better than the market).
Assessing liability risk is “easy”:– Liability is linked to CO2 equivalents emitted
– G20 / TFCD will provide tools– Get on with the assessments and baseline where you are.
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Manage the risk
• Set a plan for reducing CO2 equivalents in line with your country’s Nationally Determined Contributions or beyond.
• Set a plan for reducing exposure to physical risks.
• Be ready to answer the stakeholder question: “How will your business be affected by climate change” and have a plan to reduce that impact.
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
Climate risk summary
• Don’t ignore climate risk, it won’t ignore you.
• Work out what you need to do to protect your business.
• Reassess those plans as new evidence comes out
• Be prepared for an acceleration of governmental pressure.
• Engage with your stakeholders over what their needs are.
3 May 2023 30
IFoA Resource and Environment links
• Sign up for the Resource and Environment newsletter:http://www.actuaries.org.uk/news-and-insights/newsletters#Resource%20and%20environment
• Climate change policy briefing (2015):http://www.actuaries.org.uk/news-and-insights/media-centre/media-releases-and-statements/risk-management-approach-essential
• Commissioned research on Limits to Growth (2013): http://www.actuaries.org.uk/documents/resource-constraints-sharing-finite-world-evidence-and-scenarios-future
• Literature reviews:– Sustainability and the financial system (2015)
http://www.actuaries.org.uk/documents/sustainability-and-financial-system-review-literature-2015
– Climate change and resource depletion (2011)http://www.actuaries.org.uk/documents/climate-change-and-resource-depletion-challenges-actuaries-review-literature-2011
– Climate change and resource depletion (2010)http://www.actuaries.org.uk/documents/climate-change-and-resource-depletion-review-literature
3 May 2023 31
Further reading
• World Economic Forum – Global Risks Reporthttp://reports.weforum.org/global-risks-2016/
• IPCC AR5 Synthesis Report - Key points and questionshttps://www.gov.uk/government/publications/ipcc-5th-assessment-report-synthesis-report/key-points-and-questions-ipcc-ar5-synthesis-report
• PRA - The impact of climate change on the UK insurance sectorhttp://www.bankofengland.co.uk/pra/documents/supervision/activities/pradefra0915.pdf
• Mercer – Investing in a time of climate change 2015http://www.mercer.com/services/investments/investment-opportunities/responsible-investment/investing-in-a-time-of-climate-change-report-2015.html
• Kay Review – UK equity markets and long-term decision-makinghttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/253454/bis-12-917-kay-review-of-equity-markets-final-report.pdf
• Law Commission - Fiduciary Duties of Investment Intermediarieshttp://www.lawcom.gov.uk/project/fiduciary-duties-of-investment-intermediaries/
Progres
s
Commun
ity
Sessio
nal M
eetin
gs
Educa
tion
Work
ing pa
rties
Volunte
ering
Resea
rch
Shapin
g the
futur
e
Network
ing
Profes
siona
l sup
port
Enterpr
ise an
d risk
Learn
ed so
ciety
Opport
unity
Intern
ation
al pro
file
Journ
als
Suppo
rting
Expert
ise
Spons
orship
Thoug
ht lea
dersh
ip
3 May 2023
For Further Information
If you would like to find out more about how actuaries play a part in managing risk, please contact Matthew Levine, Policy Manager, at [email protected]
Or you can access the IFoA website and social media outlets at:https://www.actuaries.org.uk/ http://twitter.com/actuarynewshttps://www.facebook.com/Actuarial
3 May 2023 33
The views expressed in this [publication/presentation] are those of invited contributors and not necessarily those of the IFoA. The IFoA do not endorse any of the views stated, nor any claims or representations made in this [publication/presentation] and accept no responsibility or liability to any person for loss or damage suffered as a consequence of their placing reliance upon any view, claim or representation made in this [publication/presentation].
The information and expressions of opinion contained in this publication are not intended to be a comprehensive study, nor to provide actuarial advice or advice of any nature and should not be treated as a substitute for specific advice concerning individual situations. On no account may any part of this [publication/presentation] be reproduced without the written permission of the IFoA [or authors, in the case of non-IFoA research].
Questions Comments