Climate Change Adaptation

A review of an important component of climate change risk management Sam Gutterman

Photo: McDonald

Adaptation, the process of reducing the adverse effects of climate change by modifying human behavior and property, is an important, yet sometimes overlooked component of the risk management of climate change. Adjusting the ecological, physical, social or economic system can enhance processes, practices or resilience to eliminate or reduce potential loss or damage. Timely adaptation action can help save lives and livelihoods as well as enhance economic conditions. Overall, accelerating climate change adaptation is a human, environmental and economic imperative.1

The mitigation of climate change is another key risk management process, aimed ultimately at affecting climatic factors—such as the level and volatility of temperature and precipitation, for example—through reducing greenhouse gas emissions. While mitigation is a global issue, adaptation is more local. The more effective the mitigation, the less adaptation will be required—although adaptation action will be necessary in any event. While mitigation is the first line of defense in reducing the adverse changes in our climate, adaptation represents the second line, protecting against damages. Some actions can serve both functions, such as effective tree planting and maintaining wetlands.

Actuaries increasingly have been involved in catastrophe and environmental modeling, including for the estimation of the long-term costs and benefits associated with adaptation approaches. The study of adaptation efforts will be relevant to much of actuarial practice.

Systems Affected

The Global Commission on Adaptation identified2 six key societal systems that can be materially affected by both chronic and acute shocks resulting from climate change: cities, disaster recovery systems, food, infrastructure, natural environment and water. Understanding these areas is necessary to design and evaluate adaptation strategies and actions. The following list, drawing on material developed for the 2021 Climate Adaptation Action Summit,3 discusses how adaptation action should be taken regarding these and other key systems.

  • Cities. Encourage responsible growth in urban and suburban areas; for example, with resilient building codes, limits on construction in areas prone to periodic flooding or fire, and climate emigration planning.
  • Disaster recovery systems. Anticipate, manage and recover from climate-related disasters and support those who are most vulnerable.
  • Finance. Mobilize financial protection against climate risks, and reduce insurance protection gaps.
  • Food/agriculture. Transform agricultural practices and enhance biodiversity; plan to feed more people through sustainable food supply chains.
  • Health. Transform health care and emergency response infrastructure to cope with a warmer, more complex, volatile and climatic world.
  • Infrastructure. Enhance the resilience of physical infrastructure, including capacity-building and sustainable disaster risk management.
  • Jobs. Encourage green jobs and provide for job retraining in a just manner in areas affected by decarbonization and disaster recovery.
  • Natural environment. Take advantage of the power of nature with sustainable agriculture and forest management.
  • Science/technology. Utilize new technologies, enhance understanding and communication of climate change risks, and enhance knowledge/modeling capabilities. Utilize current science; for example, by overcoming antibacterial resistance and reducing outbreaks of zoonotic diseases.
  • Stakeholder involvement. Invest in community resilience and involve all relevant stakeholders in action planning and implementation.
  • Water. Manage high-quality water resources, and protect against water disasters (where there is either too much or too little water).

The location of populations and structures in an at-risk area is an important consideration. For example, for a slow-moving catastrophe, such as a too-hot-to-live-in area or a heavy population concentration in a flood- or wildfire-prone area, building standards, land-use rules and planned emigration can prevent or reduce the impact of a disaster. In an area in which malaria-carrying mosquitoes are common, appropriate chemical treatment may be effective. The World Bank projected there will be about 143 million internal climate migrants by 2050 if no climate action is taken; 17.2 million people had to leave their homes in 2019 because of natural disasters.

While investors (or taxpayers) for some mitigation projects may not see much personal return on their investment, adaptation action can pay off both in the short and long term. For example, a homeowner who invests in air conditioning to reduce heat stress and increase comfort also increases energy demands. Communities that invest in flood defenses expect to capture most of the returns in the form of reduced harm to themselves and future generations, as well as through reduced insurance premiums.

Adaptation Risk Management Process

The allocation of limited resources at global, national and community levels is always difficult. Both synergies and conflicts among social objectives will inevitably arise, with groups of stakeholders having different objectives, viewpoints and risk/loss preferences. The possibility that adaptation becomes an excuse to avoid mitigation efforts must be guarded against.

Recognition of the urgent need for adaptation planning and implementation is increasingly evident, as we already have experienced some of the impacts of climate change. This process, usually consisting of the following steps, is similar to the actuarial control cycle and often involves feedback loops.

  • Obtain data/information. Informs the analysis of climate change and regulations/laws that may constrain or encourage adaptation.
  • Assess/model. Quantifies the costs and risks, vulnerabilities, cobenefits, costs/benefits of solutions and desired resilience through scenario analysis.
  • Plan. Develops a comprehensive plan and solution(s) while considering input from relevant stakeholders.
  • Finance. Determines the best methods and sources of financing and risk pooling or transference.
  • Implement. Takes effective adaption action, which is complicated in some cases due to governmental guidelines/mandates or private-sector initiatives.
  • Monitor. Measures the actual effectiveness of the action against a benchmark, if practical.

Sound governance and effective communication with stakeholders are necessary. Both private and public sectors have roles to play. Despite current manifestations, climate change and its risks can appear remote, often emergent past the usual planning horizon. But even the most perfect adaptation plan may not be able to eliminate all of the adverse effects of climate change.

The importance of having climate-resilient infrastructure and buildings that anticipate changing climatic conditions cannot be understated. Despite this, eight of the 18 most hurricane-prone states in the United States do not have a mandatory statewide building code.4 Reasons for this omission include high construction costs, lobbying, lost tax revenue, a fear of litigation, optimism bias, dislike of an oppressive state and inertia. Some people do not want to pay an extra amount for protection against what may be perceived as a remote risk, even though the risks may not be so long term.

Society can deploy a range of adaptation methods—dykes; surge barriers; dams; expanded beaches; dunes; ecosystem-based barriers, such as mangrove buffers; strong building codes and enhanced construction techniques. Often, a small amount of protection can reduce recovery costs by a factor as much as 5:1 or 10:1.

An example of adaptation is the ongoing maintenance of a resilient and effective distribution process of high-quality food and water, which are also crucial to a well-functioning economy. Agricultural yields may decline by up to 30 percent by 2050 due to climate change. Embedded resilience and contingency planning for adverse conditions and events are needed, especially in the agriculture and fishing production and distribution industries. Perils covered can include floods, soil erosion, fires and plant disease. Especially in urban areas, this can include high-quality hygiene and sanitary practices. Subsidies or insurance discounts to encourage safe land and water resources also can help.

Two learnings from past catastrophes are:

  1. Because of massive numbers of deaths due to cyclones, Bangladesh developed an early warning system built on mobile phone texting and a system of concrete shelters and sea walls, which has resulted in significantly lower mortality rates as well as new rice varieties and floating farms.
  2. After a large number of deaths from a 2003 heatwave, the Parisian government enhanced its emergency response and health care infrastructures, which dramatically reduced the number of deaths in a similar heatwave 10 years later.

Data and Decision-Making

Relevant, reliable and consistent data are necessary for a risk management system to work effectively. Gaps in available data limit the ability of stakeholders to hold public and private actors accountable and to support needed investments.

Many countries have a legislative and policy framework to govern adaptation, often focusing on setting priorities and information sharing. For example, in 2020 the European Union (EU) adopted5,6 its Green Deal that includes an adaptation strategy: “climate-proofing, resilience building, prevention and preparedness, ensuring that businesses, cities and citizens are able to integrate climate change into their risk management practices.”

The EU also developed a taxonomy of risks and case studies for both adaptation and mitigation.7 Rather than promulgating a categorization of adaptation activities, the taxonomy established a set of guiding principles and investment screening criteria for 68 industry sectors to assess economic activities. It indicates that adaptation is context- and location-specific and uses a process-based approach to determine the extent to which an activity contributes to adaptation and climate resilience.

Indicators/metrics of adaptation progress can be grouped by whether they protect and improve human health and well-being, support vulnerable regions/population segments, reduce climate-related hazards, build climate resilience or translate scientific information into action.

The insights gained from the use of a range of scenarios represent an integral component of cost-benefit analysis, project pricing and costing, allocation of resources and insights into the uncertainties involved—especially concerning human behavior and government actions. Adaptation scenarios should reflect local, context-specific conditions and address both the short and long term. Other key factors include ethical issues involved (e.g., socioeconomic groups that need more adaptation protection) and the social discount rate8 applied.

The Most Vulnerable

The most vulnerable are usually those who have the least income or live in high-risk areas. All nations that signed on to the Paris Agreement agreed to the objective of “enhancing adaptive capacity, strengthening resilience and reducing vulnerability to climate change, to contribute to sustainable development and ensure an adequate adaptation response in the context of the temperature goal.”9 This moved local undertaking of adaption to a global ambition embedded in sustainability goals. Countries committed themselves to develop and report national adaptation plans to the United Nations (U.N.).

The International Actuarial Association (IAA) indicated10 that the impacts of extreme climate events are likely to fall disproportionately on the portion of society that does not have the financial means to invest in adaptation and resilience efforts.

Sea Level Rise

Sea level rise can occur as seawater expands when warmed or rises with meltwater from sweating glaciers and ice caps. It can cause flooding, erosion and poisoning of farmland by brine. Coastal areas, where exposed populations and businesses may be at risk, need protection as assets worth trillions of dollars may be flooded. Its costs might include abandoning low-lying coastal cities, infrastructure, ports, naval bases and commercial and residential beachfront property.

An example of adaptation to sea level rise is the Maeslant Barrier, installed in 1997 in the Netherlands, which was planned after floods in 1953. The barrier can be swung shut when the sea surges above 3 meters. It was originally planned to be used once a decade. So far, it has yet to be used, although it is expected to be used in the future, since surges are getting close to its emergency limit. A similar barrier in England, the Thames Barrier, closed eight times between its inauguration in 1982 and 1990; between 2000 and mid-2019, it was shut 144 times.

Financial Support

Financial support for adaptation can come from individuals, businesses, governments and international funding entities. Incentives (e.g., through subsidies, tax credits and insurance premium credits) will be needed to enable effective actions.

It has been estimated11 that annual expenditures of $140 billion to $300 billion by 2030 and from $280 billion to $500 billion by 2050 will be needed to strengthen the resilience of societies and economies to climate change. The Global Commission on Adaptation12 estimated that, if nothing is done to prepare for the effects of climate change, global agriculture yields will decline by between 5 percent and 30 percent by 2050, with about 5 billion people suffering water shortages at least one month a year. It estimated that global investments totaling $1.8 trillion between 2020 and 2030 could generate $7.1 trillion in net benefits; however, in 2016 only 5 percent of total climate finance went to adaptation.

Since 2015, available financing for climate adaptation has grown. Each supranational development institution active in adaptation finance, such as the World Bank,13 is making significant amounts of financing available to governments to increase resilience.

The Green Climate Fund, created to help low-income countries, has financed projects to improve the ability of small farms to cope with weather volatility through irrigation, and of urban planners to respond to extreme rainfall events through reengineering drainage systems. Developed countries agreed to contribute to this fund for climate mitigation and adaptation in developing countries. In total, the Green Climate Fund has approved $7.2 billion for 158 projects through February 2021, with 24 percent of value devoted to adaptation and another 32 percent benefitting mitigation and adaptation. Its aim is a 50:50 balance between mitigation and adaptation investments over time.

The Global Environment Facility (GEF) promotes planning, resilience-building investments and demonstration projects. It also shares best practices and has a challenge window that supports entrepreneurship in adaptation and climate resilience. It has approved $1.5 billion of grants through 2020.

Although available resources need to be allocated between mitigation and adaptation actions, both need to be addressed. This allocation will depend on individual circumstances, the desired trade-offs involved, and balance of short- and long-term effects, risk tolerance and the expected harm that will occur if action is not taken.


Risk transfer, risk pooling and insurance solutions should be components of a comprehensive approach to adaptation risk management. Adaptation can affect the incidence or severity of claims in many types of insurance, including property and casualty (P&C), life and health. While neither a direct adaptation tool nor a substitute for physical adaptation, insurance can—through its pricing, underwriting and product design—incentivize those potentially affected to undertake effective loss prevention. Actuarial risk-based pricing can help identify where risk reduction is needed most. Effective adaptation can improve insurance availability and help keep premiums affordable.

Some attempts by insurers to enhance resilience include:

  • Increases in resilience and raising awareness through information campaigns in collaboration with the building industry, civil organizations and local and national authorities.
  • Land-zoning maps of weather-related perils can be shared with insureds and policymakers.
  • Digital systems can keep insureds informed of impending extreme weather events.
  • Refusal to insure homes or the requirement of strong loss-prevention features for homes built next to forests in areas referred to as the “wildland-urban interface” (e.g., in California, expensive housing costs have pushed people onto cheaper land close to wilderness, adding to the risk of wildfire damages).

Where extreme weather-related, flood or fire perils become uninsurable by the private sector, collaboration between insurers and the public sector can provide protection. Societywide tariffs and levies can be pooled so that, together with subsidies, insurance protection can be provided using disaster recovery funds or multinational reinsurance.

Several insurers and consulting firms are developing models that include land-zoning maps of the amount and volatility of expected losses and damages due to climate change. These indicate the cost of not taking adaptative and resilience actions. Climate-related models are being refined to become region-specific and more practical. Modeling outputs also can cover adverse effects on the economy and relate to actions that help minimize the cost to and sustainability of an insurer.

Pensions and the Asset Management Industry

Many pension fund boards would like to see their assets used to facilitate effective climate change adaptation and mitigation—if done in a manner consistent with their fiduciary responsibilities and with an acceptable level of risk. This is becoming more important in pension fund investment management, with climate and environmental issues being given a higher priority in designing investment strategies.

Some environmental, social and governance (ESG)-consistent financing vehicles, such as green funds invested in companies involved in mitigation and adaptation activities, can enable pension funds to achieve these goals. Some pension fund regulators have requested information regarding the materiality of climate-related risks in their investment portfolios. The EU and others have introduced requirements for pension funds to disclose14,15 how ESG factors are considered in investment decisions.

The asset management industry is a key source of financing for adaptation strategies and can influence the management of the companies in which they invest. Successful adaptation can reduce the volatility of profits, investment returns and the value of financial firms’ investments. Although physical damage risk can be severe, the uncertainty and consequential effects on the economy can be worse.

One way to reduce these risks is to increase climate-resilient investments in green bonds and other funds that finance adaptation and mitigation projects. Market-rate loans, the main instrument for financing adaptation activities, can develop or enhance the resilience of capital-intensive adaptation infrastructure projects.

The disclosure and monitoring of climate risk are important aspects of adaptation, and they will likely be facilitated by a broader application of voluntary and mandatory disclosures. The Task Force on Climate-related Disclosures (TCFD) has published general guidance, which can facilitate consistent disclosures for financial market participants.

Sam Gutterman, FSA, CERA, FCA, FCAS, HonFIA, MAAA, is a consulting actuary in Glencoe, Illinois.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

Copyright © 2021 by the Society of Actuaries, Chicago, Illinois.