The Challenges of Climate ChangeThe global actuarial response to the difficulties of climate change April/May 2018
Statements of fact and opinions expressed herein are those of the individual author(s) and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
Global warming is not a black swan, and actuaries around the world have been aware for many years of the importance of this phenomenon. Climate change is not limited to global warming, but combines uncertainty with risks of a variety of extreme weather events and rise in sea levels. The special expertise of actuaries in managing risks and uncertainty, combined with their understanding of future scenarios, entails a social responsibility.
The primary responsibility of actuarial associations is to ensure that actuaries are adequately informed, develop best practices and build the expertise necessary to provide advice of high quality. The basic objective is to ensure the sustainability of insurance products and social protection programs, despite pervasive impacts of climate change on actuarial methodology and assumptions. Furthermore, actuaries need to work with other professionals and share information to enable decision makers and civil society to correctly assess the policy choices that will define our collective future.
Actuaries can appreciate the gap that the high-risk appetite nations are displaying with regard to achieving the common goal of keeping global warming below 2 degrees Celsius, in comparison to the level of risks we tolerate in other undertakings. Nations around the planet are slow to wake up to the gravity of this challenge to a secure future, and the actuarial profession shares some part of the responsibility. This calls for increasing public outreach to help promote a greater sense of urgency in taking difficult initiatives that may profoundly affect our way of life. Such initiatives are essential to increase the probability of success in reaching our common goal.
How does the global actuarial profession respond to the challenge of climate change? Although it is not exhaustive, the following summary demonstrates that the actuarial profession is taking seriously its responsibility to help humanity face the challenges that climate change poses to our society and way of life.
Principle of Subsidiarity
The harmonization and coordination of the deployment of resources by the International Actuarial Association (IAA) and its member associations rest on what is known as the Principle of Subsidiarity enshrined in the current IAA statutes adopted in 1998. It reads:
Article 8 Cooperation—The IAA will restrict its activities to strategies and programs, which require international coordination or direction, or can be handled more efficiently across national and regional boundaries. It will not become involved with actions at the level of the member associations or regional groups of actuarial associations, except at the express invitation of such an association or group.
The IAA will therefore take any measures necessary to avoid duplication or overlap with the activities of member associations or regional groups of actuarial associations.
Thus, the respective mandates respect the principle of subsidiarity and optimize the utilization of the limited resources of a profession with a global membership limited to approximately 65,000 individuals distributed across 110 countries.
A Three-Level Response
The actuarial profession is responding at three levels: international, regional and local. The context is that the International Actuarial Association (IAA)—which has the mandate of moving the profession forward internationally—is an association of associations and has no individual members. Thus, essentially the human resources of the global profession are the resources of its full member associations (FMAs) that certify individual actuaries at the local or national level.
Climate-related activities at the international level are conducted mainly by the Resources and Environment Working Group (REWG) of the IAA. The creation of a working group was authorized in September 2009. By May 2011, 24 members had been recruited, and Terms of Reference were drafted and adopted on Sept. 29, 2011. Its launch took the form of a seminar held in Los Angeles in May 2012. The REWG operates within the IAA Statutes and Internal Regulations and makes recommendations for consideration by the IAA Scientific Committee as appropriate.
As required to carry out its role and activities, the REWG liaises with similar entities in local actuarial associations as well as with external stakeholders. It shares with the working groups on mortality and population issues information regarding environmental developments and initiatives that can have effects on the work of these two groups and liaises with other IAA committees, working groups or sections. Support has been expressed to the education committee for proposed additions to the IAA Syllabus regarding sustainability and climate change.
One of the objectives of creating a working group at the IAA level is to stimulate the creation of similar entities (work groups, committees, sections) at the level of local or national associations. At that time, local entities were known to exist in Australia, Canada, the United Kingdom and the United States, although individuals were active in other FMAs. Even though distinct entities have not been formally created in many other FMAs, it has stimulated interest toward climate issues in many associations. Thus, the objective is partially met through the increase in the number of actuaries participating as members or observers in conference calls or face-to-face meetings. A significant number of associations have members in the REWG that also include a representative of the IAA ASTIN Section. Over the years, activity reports have been made on behalf of FMAs in Ireland, France, South Africa, Finland, Japan and Jamaica. With more than 60 members and observers, the REWG is, de facto, a forum for the exchange of information.
Through the REWG, the IAA is a supporting institution of the United Nations Environment Program—Finance Initiative, Principles of Sustainable Insurance. The IAA sent an application to become an observer at the United Nation Framework Convention on Climate Change (UNFCCC), the UN agency that is responsible for managing the annual meeting of the Council of Parties (COP). Its 2015 meeting resulted in the Paris Agreement. The application is still pending subject to confirmation of the nonprofit status of the IAA. Nevertheless, a formal letter of support was sent to the UNFCCC on behalf of the actuarial profession ahead of the COP 21 meeting in Paris.
The REWG is providing:
- Support to the Warsaw International Mechanism for Loss and Damages created by the COP to help implement approaches to mitigate the impacts for climate change
- Detailed comments to the Bloomberg Task Force on Financial Reporting of the Financial Stability Board
- Input to the European Union High Level Expert Group report on sustainable finance
- Comments on an OECD Disaster Recovery paper
- Communication channels with International Social Security Association (ISSA) and the World Meteorological Organization (WMO)
Presentations are to be made in June 2018 at the International Congress of Actuaries in Berlin with regard to recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and on issues addressed in a recent climate change and mortality paper. This paper, developed by a subgroup and approved by the Scientific Committee, was presented at the Mortality and Population Issues Symposium last October in Chicago and was published in November 2017 on the IAA website. A synopsis of this paper can be found in “The Vulnerable.”
The REWG has submitted to the Scientific Committee a project of periodic communications through the IAA website reporting on the progress in controlling greenhouse gasses (GHGs) in the atmosphere compared with goals set forth in the Paris Agreement. The publication could be in the format of a press release to be used also by FMAs to promote awareness of the challenges arising from global warming. Increasing the public outreach would support the recommendations of the TCFD in favor of greater transparency in climate disclosures.
Small teams or subgroups are driving various ongoing projects, including:
- Carbon pricing/decarbonization. A project with the aim of developing a relatively short report.
- Vulnerable populations and insurance. A monograph developed in collaboration with the Micro Insurance Working Group.
- Flood risks. A paper, not nation-specific, but similar to one published by the American Academy of Actuaries (the Academy).
- Government budgetary impact. This is an extension of TCFD requirements to the public sector since every government in the world ought to be looking at climate-related future costs in some way, in a manner similar to long-term social insurance programs. If this is done consistently, it could reframe the larger climate change debate; but at the moment, most of these future cost pressures are not yet visible.
- Triple bottom line. Environmental, social, governance (ESG) issues that should lead to a series of reports. Another similar project, a literature review focusing on new economic readings, is being discussed internally through a separate listserv before highlights become available through the website.
The REWG discussed the possibility of developing an Environmental Management System (EMS) for the IAA that could be cloned by other actuarial organizations. The conclusion is that the IAA staff is too small, and that the REWG should rather piggyback on efforts undertaken by the Institute and Faculty of Actuaries (IFoA), which is working on an EMS for itself. That represents a good application of the subsidiarity principle. The REWG will follow this effort and hope to leverage the results for the benefit of other associations.
The REWG website and virtual library are part of the IAA website, and in conjunction with the IAA virtual library, facilitate access to material and information related to climate change and sustainability issues by actuaries and the public in general.
An example of activities coordinated at the regional level is a joint initiative of four major North American actuarial associations started in 2010 resulting in the quarterly publication of a unique Actuaries Climate Index (ACI). An Actuaries Climate Risk Index (ACRI) is also in development (read more about this in “Turning Up the Heat,” from the December 2017/January 2018 issue of The Actuary. Actuarial associations in other geographical areas have expressed interest in extending the scope of the ACI/ACRI, or developing a local index for additional segments of the planet.
In 2010, the four associations commissioned Solera Solutions, a Canadian private research firm specialized in assessing risk and developing strategies for climate change adaptation and mitigation, to prepare the research study, “Determining the Impact of Climate Change on Insurance Risk and the Global Community.” The authors are three Canadian scientists involved in a variety of environmental activities. Obviously, the decision is the outcome of internal preliminary work done over many months by the respective associations and discussions to define the scope of the project.
Actuaries from all four associations are active members of the two joint committees that support the development of the ACI/ACRI: the Climate Index Work Group (CIWG) and the Index Diagnostic Team (IDT). The quarterly ACI press releases issued since November 2016 mitigate the necessity of other activities to sustain awareness of climate issues and push actuaries to continuously update their climate literacy. Despite the major investment in time and effort as well as out-of-pocket expenses in this major undertaking, the four FMAs continue to conduct distinct climate-related initiatives at their local level, focusing on different aspects.
American Academy of Actuaries (the Academy)
The Academy conducts climate activities through its Property/Casualty Extreme Events Committee. Successive editions of its magazine, Contingencies, feature articles on climate-related issues, including a cover story on rising sea levels.
A December 2016 publication, “Essential Elements, Making Complex Public Policy Issues Clear,” focuses on extreme events. A major contribution of the Academy in March 2017 was the publication of a 100-page monograph, The National Flood Insurance Program: Challenges and Solutions, written by its Flood Insurance Working Group. It contains an entire chapter on rising sea levels.
The Academy held a Capitol Hill briefing on flood insurance, and in August 2017, it submitted a letter to the U.S. Senate Committee on Banking, Housing and Urban Affairs discussing 11 issues regarding flood insurance legislation.
Canadian Institute of Actuaries (CIA)
The Climate Change & Sustainability Committee (CCSC) dates from April 2014. Presentations on climate issues are made by the committee at each annual meeting as well as periodic CIA Board meetings.
The resource page on the CIA website and a public policy statement recognizing the anthropogenic contribution to climate change both date from 2015. An expanded public statement is being prepared for 2018, and it will cover climate change impacts on life and property and casualty insurance, investments and pensions.
A major research report, “Climate Change and Resource Sustainability: An Overview for Actuaries,” published in July 2015, is used to inform the membership about the wide range of climate issues. It is available for actuaries and visitors to the website. Education guidelines are planned as a follow-up starting in 2018.
The CCSC made a submission to the Ontario Ministry of the Environment and Climate Change in 2015, presented on the role actuaries should play to the Natural Resources Canada Symposium in April 2016 and responded to the consultation of the FSB Task Force on climate-related financial disclosures in February 2017.
Since 2014, the CCSC has organized a one-day Educational Forum, sponsored or co-sponsored five sessions, and presented four webcasts to the membership, in addition to a webinar on the ACI/ACRI.
In November 2017, a presentation was made at COP23 on the role of the Information and Communications Technologies (ICT) sector in climate adaptation. The CIA also participated in the UN Environment’s Principles for Sustainable Insurance Initiative (PSI) and Munich Re event, Shaping the Sustainable Insurance Agenda in North America, in Princeton, New Jersey.
Since the CIA is officially bilingual, the research paper and many of the presentations, including the ACI, are available in both English and French. Thus, the CCSC has expanded its outreach beyond Canada to French-speaking actuaries in other countries.
Casualty Actuarial Society (CAS)
The primary purpose of the Climate Change Committee (created in November 2008) is to recommend, support and perform research on climate change and assess the potential risk management implications for the insurance industry. The CAS focuses on education and research in the nonlife area, which includes extreme climate events such as floods, hurricane and drought. The professional interests of its members are a natural match for global warming and other consequences of climate change.
Over the last few years, the CAS publications, Variance and the E-Forum, include a number of articles on climate change, namely “Incorporating Spatial Dependence and Climate Change Trends for Measuring Long-term Temperature Derivative Risk,” and eight papers resulting from the 2013 Climate Change Call for Essays.
In addition, many presentations on various aspects of climate change, including insurance response, risk management, CAT modeling, severe weather, green consulting and other topics have been delivered at CAS seminars and meetings. They remain available on the website.
“Where Home Insurance Meets Climate Change: Making Sense of Climate Risk, Data Uncertainty and Projections” is a research project funded by the Climate Change Committee. The research paper is under review by the CAS Variance editorial staff.
As of November 2017, the committee is reviewing five papers received pursuant to the 2018 Climate Change Call for Papers.
Society of Actuaries (SOA)
The SOA focuses on education and research. The article, “Determining the Impact of Climate Change on Insurance Risks and the Global Community Phase 1: Key Climate Indicators,” has been on its website since November 2012. With work on climate risks ongoing for many years, the Climate Change and Environmental Sustainability Research Committee was formally established in 2015.
The SOA is working on several research projects, and several literature reviews are posted on its website. Two repositories of information relevant to actuaries are posted under the headings “Climate Sources for Actuaries” and “Climate, Weather and Environmental Sources for Actuaries.” A paper covering social discounting is expected to be available early in 2018.
While it highlights primarily Canada and the United States, the SOA is offering its exams to a large number of candidates around the world. Thus, the geographic outreach extends to other countries, which abates the lack of specialized resources in many smaller associations to address climate issues adequately.