The year 2024 was a stark reminder of the escalating climate crisis, with records broken across the board. We experienced the hottest year in recorded history , the highest concentrations of greenhouse gases, and the highest ocean heat content. Furthermore, there was record-low extent of Antarctic sea ice and unprecedented levels of glacier retreat. These weren't just abstract statistics; they translated into significant real-world impacts, including major storms, severe flooding, heatwaves, wildfires and droughts. These events are having cascading effects, negatively impacting food security, forcing population displacement, causing infrastructure damage, and resulting in substantial insurance losses.

These impacts are not isolated events. They are reinforced by positive-feedback loops, accelerating climate change and amplifying weather-related catastrophes. Understanding the complex dynamics of climate change is crucial, and this is where actuaries can, and indeed must, play a vital role.

Defining the Terms

To tackle the challenges effectively, we need to be clear about the terminology:

• Climate is defined as the "average weather" over time, encompassing elements like temperature, sea levels, and precipitation. 
• Climate risk refers to the potential negative consequences for society and ecosystems that arise from climate change impacts. 
• Anthropomorphic climate change refers to changes in climate that are driven by human behaviour, particularly the emission of greenhouse gases (GHGs). 
• Climate projections are simulated responses of a climate system to different future GHG emission or concentration scenarios, typically derived using sophisticated climate models. 
• Climate-related financial risks encapsulate the potential financial implications due to climate change itself or efforts to mitigate it.

Modelling the Risks

Modelling climate risk involves using representative climate pathways based on expected future GHG emissions. These pathways link GHG emissions to core climatic quantities like global surface temperatures, mean sea level, and precipitation. This is the basis for understanding the frequency and severity of risks, including weather-related natural catastrophes, impacts on mortality and morbidity, credit risk, market risks, taxation, legal costs and reputational impacts.

However, this process is not without its challenges. Climate risk modelling is extremely complex, spans a long-time horizon, requires localization and is plagued with data limitations. This is largely due to the fact that there's no historical precedent for setting assumptions – current climate trends have not been experienced in the last 100,000 years. This lack of historical data makes setting assumptions for modelling particularly difficult.

The Actuarial Role

Actuaries have a unique skill set in addressing climate risk. They have a significant role to play in climate risk modelling, including GHG emissions, the financial impact of climate change, and the impact of transitioning to a low-carbon economy. Furthermore, they play an essential role in climate risk management, ensuring that climate considerations are integrated into enterprise risk management [LL3] frameworks. In the insurance sector, actuaries are crucial in addressing how climate change impacts pricing, reserving and capital management, and in creating innovative new insurance products.

Actuaries also play a key role in finance and investment, assessing how climate risk affects asset values and investment returns. Actuaries are also critical in credit risk modelling, and assessing how climate change impacts borrower's ability to pay. Finally, actuaries have an important role in corporate strategy and governance, ensuring that climate change is integrated into strategic decision-making, reporting and disclosure. Actuaries can also contribute to climate reporting, providing assurance on quantitative and qualitative disclosures related to climate risks and emissions.

Key Takeaways

Actuaries possess the technical expertise and soft skills to help organizations tackle climate change challenges. This includes incorporating climate risk impacts into actuarial models, effectively communicating both short-term and long-term impacts to stakeholders, and collaborating with policymakers. Actuaries can contribute to product innovation in the insurance sector and identify opportunities in financing and insurance of renewable energy products. Importantly, actuaries also have a professional responsibility to remain technically competent on the subject of climate change and to act in the public interest by working to promote a just transition.

In conclusion, the challenges posed by climate change are immense, but the actuarial profession is well-placed to lead the way toward more sustainable and resilient solutions. Actuaries must enhance their understanding of climate risk, work collaboratively with diverse stakeholders, and drive positive change.

This blog post is an outline of a presentation given at the Society of Actuaries’ Riyadh Symposium on 25 November 2024. Ernest Louw is a Consulting Actuary and Group CEO at Lux Actuaries. He is a Fellow of the Actuarial Society of South Africa (ASSA) and a member of ASSA’s Climate Change Committee.

The actuarial profession is uniquely positioned to help organizations navigate the complexities of climate risk. If you’re looking to strengthen your climate risk modelling or need expert guidance on integrating climate change into your financial strategy, reach out to us today. Our team is ready to help you drive sustainable, data-driven solutions.