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Actuarial Considerations Around Climate-Related Risks on Social Security - June 2024
Climate change presents a formidable challenge to social security systems worldwide. This paper explores the implications of climate-related risks on social security, focusing on actuarial perspectives.
Climate-related risks disrupt demographic, economic, and investment-related assumptions critical for social security analysis. Accurate projections require consideration of practical scenarios amidst uncertainties. Despite challenges, quantifying climate scenarios aids in understanding risks and informing decision-making. Improved data and scenario exploration enhance probabilistic support for economic and financial analyses. The paper delves into the main climate-related risks that affect Social Security Programs, key assumption classes crucial for social security actuarial projections, and future uncertainties and opportunities. It offers practical insights and methods for integrating climate risk considerations and potential impacts on actuarial work for Social Security Programs.
The aim of this paper is to create awareness and assist actuaries (and others) in understanding the role actuaries can play in collaboration with social security professionals to design resilient programs. Enhancing qualitative and quantitative analysis is essential for developing climate-resilient systems.
The Climate Risk Task Force will host a webinar later in the year to present this paper. Information about the webinar will follow.
 Glossary of Defined Terms Used in IAA Climate-Related Risk Publications
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The Climate Change Adaptation Gap: An Actuarial Perspective - May 2023
Adaptation, when used in relation to climate, is the process of adjustment to actual or expected climate and its effects. Progress on climate adaptation has been slow, siloed and incremental, with little evidence of the transformative adaptation that is needed to address significant climate hazards and exposures. There is a substantial gap relative to the level of adaptation likely to be needed given predicted levels of global warning. Investment in adaptation now can reduce the ultimate costs of climate change significantly.
Actuaries can contribute to adaptation planning and the assessment of potential adaptation actions, not only in the usual areas of actuarial practice but through broader application of their experience and skills in risk management and cost-benefit and scenario analysis.
This paper aims to provide an overview of the issues involved in adapting to climate change, both in general terms and with a focus on considerations relevant for current areas of actuarial practice. It also aims to identify areas in which actuaries can participate more broadly in adaptation action. Actuarial training in risk assessment and measurement means that actuaries will take account of the uncertainties inherent in designing adaptation solutions and anticipate and quantify the costs and benefits of such solutions over time, having regard to a range of potential climate scenarios.
Glossary of Defined Terms Used in IAA Climate-Related Risk Publications
Webinar held on June 27, 2023:
Presentation:
by Gabor Hanak (Chair of CRTF), Aisling Kennedy, Sam Gutterman, and Stuart Wason (Co-Authors)
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Climate-Related Disclosures and Risk Management: Standards and Leading Practices - October 2022
The aim of this paper is to assist actuaries (and others) to understand the principles and leading practices for preparing climate-related disclosures, and how they can be used to inform risk management processes in relation to the impacts of climate change. Using their specific skills and their professional judgment, actuaries are well placed to help companies, investors, policymakers, and society to better understand the risks and opportunities involved and meet the disclosure standards and reporting requirements.
While climate-related disclosures should reflect a company’s own business and regulatory environment, the expectation is that in due course the various frameworks will become sufficiently standardized to facilitate comparisons across firms, industries, and countries.
Just as importantly, companies will be able to leverage these disclosures to structure their climate strategy and governance, demonstrate their resilience to climate-related risk and communicate in a transparent way how they contribute to building a more sustainable world.
Glossary of Defined Terms Used in IAA Climate-Related Risk Publications
Webinar held on November 3, 2022:
Presentation:
by Jérôme Crugnola-Humbert, Santiago Fiallos, and Xi Cynthia Yuan
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Application of Climate-Related Risk Scenarios to Asset Portfolios
- April 2022
The focus of this paper is the assessment and projection of asset cash flows and market values, taking into account climate-related risks to be incorporated in the analyses and reports provided by actuaries.
Some typical portfolios and related case studies are included in the paper to illustrate how climate-related risk scenario analysis is applied to asset portfolios in the context of life insurers, pension funds, general insurers, and lending banks. The underlying intention is to assist actuaries and others to understand how institutional asset portfolios may be affected by exposure of investments to climate-related risks (a bottom-up approach) and appreciate how climate-related risk scenarios could impact macro-economic variables and parameters (a top-down approach). The paper discusses commonly used portfolio-level risk measures and metrics and shows how different asset classes are impacted by climate-related risks.
Glossary of Defined Terms Used in IAA Climate-Related Risk Publications
Webinar held on April 26, 2022:
Presentations:
by Gabor Hanak, André Choquet and Eileen Tay
by William Harding, Sustainable Insurance Forum
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Climate Science: A Summary for Actuaries - What the IPCC Climate Change Report 2021 Means for the Actuarial Profession
- March 2022
Webinar held on April 13, 2022:
Presentations:
by Valérie Masson-Delmotte
by Yordanka Velichkova
by Rade Musulin
Recording:
This Summary, based on the IPCC Working Group I Sixth Assessment Report released in August 2021, is tailored to the actuarial community to provide helpful insights into what the IPCC report means for the Actuarial profession.
The IPCC Working Group I report addresses the most up-to-date physical understanding of the climate system and climate change. It brings together the latest advances in climate science, combining multiple lines of evidence from paleoclimate, observations, process understanding, and global and regional climate simulations to get the clearest picture of past, present, and possible future climate.
Actuaries, as risk professionals, need to understand the physical impacts of climate systems and climate changes. Such impacts will affect how risks are underwritten, priced, managed, and reported, whether for general, life or health insurance, pensions, other financial institutions, or social security. It is important for actuaries to understand the magnitude of the potential changes, the uncertainty of their frequency and intensity, and the inherent volatility of such risks.
Each of the physical changes analyzed in the latest IPCC Working Group I report could have an impact on human well-being and the long-term sustainability of the environment. Within these changes, actuaries are particularly interested in the effect of climate change on floods, droughts, fires, storms, rise of sea level, air pollution and the long-term effects of climate change. The Summary focuses on the physical changes affecting the most common perils analysed by actuaries and is supplemented with two Annexes on data and regional specificities and a glossary to support its users.
Citation: IAA, 2022. Climate Science: A Summary for Actuaries. [Sarah Connors, Micheline Dionne, Gábor Hanák, Rade Musulin, Neil Aellen, Muhammad Amjad, Steven Bowen, Daniel Ruiz Carrascal, Erika Coppola, Eric Dal Moro, Alessandro Dosio, Sergio Henrique Faria, Thian Yew Gan, Melissa Gomis, José Manuel Gutiérrez, Pandora Hope, Robert Kopp, Svitlana Krakovska, Katherine Leitzell, Douglas Maraun, Valérie Masson-Delmotte, Robin Matthews, Tom Maycock, Sharanjit Paddam, Gian-Kasper Plattner, Alex Pui, Mohammad Rahimi, Roshanka Ranasinghe, Joeri Rogelj, Alex C. Ruane, Sophie Szopa, Andrew Turner, Robert Vautard, Yordanka Velichkova, Andreas Weigel, Xuebin Zhang]. International Actuarial Association.
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Climate-Related Scenarios Applied to Insurers and Other Financial Institutions - August 2021 - This paper is the third of a series of papers that will be developed, aimed at creating awareness and promoting actuarial approaches in climate-related risk management and reporting. The first paper Importance of Climate-Related Risks for Actuaries, and the second paper Introduction to Climate-Related Scenarios were released in September 2020 and February 2021 respectively.
This third paper continues the discussion begun in the second paper in the series, by considering as a starting point the process of using scenarios at the level of an individual insurer or other financial institution at the national level. It examines the challenges faced by actuaries in implementing scenario analysis for climate-related risks and outlines a range of possible approaches.
Three simplified case studies are included to illustrate the concepts developed in this paper. These case studies have been chosen to stimulate broad thinking rather than to focus on an approach taken by a specific financial institution or for specific blocks of business. It is hoped this paper can assist actuaries and others to understand the building blocks of climate-related scenarios and how they can be used to inform many critical risk management functions surrounding climate-related risks.
Glossary of Defined Terms Used in IAA Climate-Related Risk Publications
Webinar held on September 29, 2021
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Introduction to Climate-Related Scenarios - February 2021 - This paper is the second of a series of papers that will be developed, aimed at creating awareness and promoting actuarial approaches in climate-related risk management and reporting. The first paper - Importance of Climate-Related Risks for Actuaries – was released in September 2020.
This second paper aims to provide background covering the principles and outlining the processes for developing climate-related scenarios. It focuses on climate-related financial risks but does not cover the scientific basis of climate change beyond what is necessary for understanding its impacts. It aims to help actuaries and risk managers to acquire the basic vocabulary of climate science. It particularly serves those less familiar with the details of climate research who wish to develop or use climate-related scenarios.
The paper provides helpful insights into the requirements for good scenario analysis, components from which scenarios can be assembled, and considers some of the tools available to actuaries. It reviews the challenges and barriers that need to be considered in the development or use of workable climate-related scenarios and how those barriers may impact planning and implementation of adaptation actions and building resilience.
Glossary of Defined Terms Used in IAA Climate-Related Risk Publications
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Importance of Climate-Related Risks for Actuaries - September 2020 - Climate-related risk has the potential to seriously affect the entire world. The degree and timing of upcoming changes in our climate involve a great deal of uncertainty, creating widespread concern about its recent and potential impacts under alternative possible scenarios. Even if the most severe climate-related risk scenarios do not materialize, many financial institutions and most individuals will nevertheless be affected. A range of effects is now being actively considered by governments, regulators, the insurance and reinsurance industries, pension plans and other entities.
This paper is the first of a series of papers aimed at creating awareness and promoting actuarial approaches in climate-related risk management and reporting.
This first paper discusses the main components of the climate-related risks relevant to actuaries, their implications, the broad categories of actuarial work and the importance of climate-related risk to each category. The categories considered are actuarial modelling, product management, risk and capital management, investment management, and disclosure. The paper concludes suggesting several next steps to consider moving forward.
Japanese Translation
Glossary of Defined Terms Used in IAA Climate-Related Risk Publications
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Pension Fund Environmental, Social and Governance (ESG) Risk Disclosures: Developing Global Practice - December 2020 - This paper summarizes the main features and trends in pension fund ESG risk disclosures around the world available to regulators, members and the public. Pension fund ESG risks are important in terms of long-term fund performance and delivering members’ benefits, as well as in relation to wider societal impacts, and this is a rapidly developing area. Based on the information gathered via a survey of 14 countries, the paper looks at how local legislation, type of pension fund, size, structure and available resources, among other factors, affect pension funds engaging in ESG disclosures.
The paper highlights important issues and trends relating to ESG disclosures that actuaries involved with pension funds, whether as trustees, investment managers, investment consultants or advisers on funding or governance, should be aware of, so that they can ensure their clients or employers address the challenges on a timely basis. It is also relevant to the wider pension fund community.
Webinar held on January 21, 2021
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Risks to Water Resources - November 2020 - Since water resources are critical for human survival, even short-term disruptions in the supply of water can have potentially devastating consequences, including adverse impacts on financial security systems. The main purpose of this paper is to start a discussion on water resource risk among actuaries before addressing the broader scientific and public policy communities. We believe that actuaries need to be informed about how water resource risks affect a wide range of perils commonly insured, including life, health, property and agriculture.
The paper illustrates the central risks by considering three representative systems in New York City, Mexico City and India. It goes on to illustrate best-practice actuarial risk management techniques, applied in a context outside the traditional actuarial domain. The paper employs what we believe to be best-practice actuarial risk management techniques, applied in a context outside the traditional actuarial domain. It may therefore serve as a useful educational tool, and a showcase for the profession’s risk management capabilities.
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Climate Change, Insurance and Vulnerable Populations - October 2019 - The primary objective of this paper is to provide useful information concerning the extent to which private- and public-sector insurance can, using appropriate tools and models, address the needs of vulnerable populations regarding the adverse effects of climate change. The message provided by this paper is that private- and public-sector insurance programs can play a key role in addressing climate-related risks, though some of these programs have inherent limitations and cannot work effectively by themselves in all circumstances.
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Flood Risk - June 2019 - This paper provides a description of flood risk and how it can be managed. It is intended to provide a fundamental background and encourage discussion on this important topic for use by actuaries, regulators, and public policy planners around the world. Aspects covered include: the entire flood risk management process, methods that can be used to assess, mitigate, and finance the risks involved, the role of insurance and governments, public policy implications, and the role of actuaries. Floods are a major threat to life, health and property across the world, making the methods of mitigating and financing them vitally important. A wide variety of approaches to manage this risk have been taken by both the private and public sectors, the best combination of which has to be determined by each country. It is the desire of the REWG that the principles considered in this paper can be effectively utilized by each country.
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Decarbonization: A Briefing for Actuaries - September 2018 - This paper provides an introduction to the topic of decarbonization for actuaries around the world. Aspects covered include: the main types and sources of greenhouse gas emissions; relevant international agreements; commitments made; the policies adopted; likely future developments; and, observations on potential actuarial implications. While decarbonization will increasingly affect every economy and will transform how and what goods are produced and services are provided, the timing and progress of change is highly uncertain.
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