IAA.CLIMATE

Question 1

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

Answer 1

• 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

Question 2

What is physical 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

How are general insurers exposed to physical risk (4)

Answer 3

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,…)

Question 4

Examples of physical risks (6)

Answer 4

• 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)

Question 5

What is transition risk

Answer 5

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

Question 6

Actuarial considerations for transition risk include (3)

Answer 6

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

Question 7

What is liability risk

Answer 7

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)

Question 8

How can insurers mitigate excess loss from climate risk

Answer 8

• reprice or refuse policies annually
• recalibrate prices of natural hazards and product design using the latest science and experience

Question 9

What do AA need to consider and should comment on for climate risk (3)

Answer 9

• leading indicators of climate change risks (should be reflected in pricing)
• regulatory and legal changes
• new products, products design and other industry developments

Question 10

When modeling catastrophes, actuaries should consider (4/7)

Answer 10

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

Question 11

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

Answer 11

Applications: annual pricing and valuation

How to adjust natural hazard catastrophe model: use current climate-related risks with small annual increments

Question 12

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

Answer 12

Applications: portfolio steering

How to adjust natural hazard catastrophe model: sensitivity testing with trends in parameters

Question 13

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

Answer 13

Applications: capital position, rebalancing business

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

Question 14

What is systems thinking

Answer 14

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

Question 15

Benefits of Systems thinking (2)

Answer 15

• assist firm with thinking of interconnectedness of the modern economy
• helps derives value for the variables needed to estimate impact of climate scenarios

Question 16

What are exploratory scenarios

Answer 16

• used to explore a range of alternative plausible scenarios
• tests strategies for resilience taking into account a wide range of future states
• stress tests fall in this category

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 falls into the category

Question 18

Considerations when using IPCC reports for scenario analysis (2/3)

Answer 18

• Implicit assumptions that financial markets, healthcare systems, supply chains and communication will be functioning at required level
• Inherent assumptions in the modelling approach used to estimate value of assets and liabilities
• Actions by one firm to address its climate related 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