IAA.Climate

Question 1

What are the challenges faced when doing scenario analysis for climate risks? (3)

Answer 1

• Climate scenarios provided by organizations such as the IPCC 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

Question 2

What is physical risk regarding climate risk?

Answer 2

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

Question 3

What are the main effects of physical risks? (4)

Answer 3

• Increased property claims
• May increase or decrease investment values
• Effects credit risk
• Higher workers comp claims

Question 4

Examples of physical risk & their impacts & risk to insurer

Answer 4

Droughts & bushfires:
- Caused by: higher temperatures
- Risk to insurer: changing freq/sev

Costal inundation & erosion:
- Caused by: higher sea levels
- Risk to insurer: reputation risk if claim denied or unanticipated ex-gratia

Flood:
- Caused by: increased rainfall density
- Risk to insurer: increase in freq/sev of flood claims (when flood coverage is provided)

Question 5

What is transition risk regarding climate risk?

Answer 5

Transition risk is the risk to a firm’s business due to the shift towards more sustainable and environmentally friendly operations

Question 6

Examples of transition risk

Answer 6

• New technologies such as EV
• Shifts in types of industries that may require changes in products or coverages underwritten
• Growth and contraction of economic sectors that can affect the insurer’s premium revenue

Question 7

What is liability risk regarding climate-risk?

Answer 7

Liability risk for certain contracts can arise from firm’s failure to address financial and strategic risks via mitigation, adaptation, or disclosures

• For ex: D&O & Professional Liab coverages

Question 8

How can insurers mitigate climate risk?

Answer 8

• Reprice of refuse policies annually
• Recalibrate prices of natural hazards and product design using the latest science

Question 9

What do actuaries need to consider for climate risk?

Answer 9

• Leading indicators that pertain to climate change
• Regulatory and legal changes
• New products, product designs and other industry developments

Question 10

Natural hazard catastrophe modelling needs to be adjusted to expand beyond replicating historical weather patterns. Actuaries should consider (4)

Answer 10

• Capturing current climate risk in underlying assumptions
• Updating exposures in model to current state
• Analyze different time horizons for different applications
• Segregate effects of climate change by geographical areas

Question 11

Analyzing different time horizons for different applications - Short-Term Time Horizon considerations: Application & How to adjust hazard catastrophe model

Answer 11

Applications: Used for pricing and valuation

How to adjust natural hazard catastrophe model: use current climate risk with small increments

Question 12

Analyzing different time horizons for different applications - Medium-Term Time Horizon considerations: Application & How to adjust hazard catastrophe model

Answer 12

Applications: Portfolio steering

How to adjust natural hazard catastrophe model: do sensitivity testing with trends or step changes in the parameters

Question 13

Analyzing different time horizons for different applications - Long-Term Time Horizon considerations: Application & How to adjust hazard catastrophe model

Answer 13

Applications: Capital position and rebalancing business

How to adjust natural hazard catastrophe model: sensitivity testing under different scenarios

Question 14

What is systems thinking?

Answer 14

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

Question 15

Benefits of systems thinking (2)

Answer 15

• Assist firms with thinking of the interconnectedness of the modern economy
• Helps derive values for the variables needed to estimate impact of climate scenarios

Question 16

What are exploratory scenarios?

Answer 16

• Used to explore a range of scenarios
• Considered useful for test strategies for climate change
• Stress testing is used in this case

Question 17

What are normative scenarios?

Answer 17

• Future outcomes are set from plotted pathways
• Used to assess targets and implementation plans
• Reverse Stress Testing is used in this case

Question 18

Aspects of risks that may be missed when using IPCC reports:

Answer 18

• Implicit assumptions that financial markets, healthcare systems, supply chains and communications will function at required level
• Inherent assumptions used in modelling of assets and liabilities
• Importance of sequencing, correlation and cascading effects
• Paths and impacts of climate-related risks to critical infrastructure to determine resilience
• Extent of asset and liability correlation
• The possibility that actions by one firm to address climate risk may create risk for another

Question 19

What are scenario storylines?

Answer 19

Scenario storylines link historical and present events with hypothetical futures by describing causal pathways and drivers, assumptions and affected systems