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08

The environment: What are actuaries doing?

Open-access content Thursday 23rd August 2012 — updated 3.00pm, Wednesday 6th May 2020

Therese Kieve considers actuarial efforts in planetary preservation

Have you ever wanted to make a positive impact on the world? In particular, would you like to help preserve our planet?

Here are some ways that actuaries are doing just that in their day job and in their free time.

General Insurance Pricing

Adverse weather-related events due to climate change are having a significant impact on society. GI actuaries typically use their expertise to price for weather-related claims. However, it is no longer possible to depend on historic trends. Actuaries are, therefore, using their skills in new ways to adapt to these changes and provide financial protection for those most affected.

Oliver Bettis, GI Actuary, has a strong personal interest in climate change. In March 2009, he co-presented at a session on the "Risk of Ruin from climate change" at the Climate Congress in Copenhagen. He currently serves as Chairperson of the Actuarial Profession's Resource and Environment Working Group (REG).

What inspired him to take the first step?

Bettis explains, "My story started a few years ago, in early 2007, when I had to rate the insurance premium for a contract that related to subsidence insurance. I had to look up the UK long-term weather record, and I was shocked by the amount it had changed already. The frequency of hot summers has increased hugely, compared with the long-term record of the last 200 years. This made pricing this contract extremely difficult, because I could no longer rely on the long-term weather patterns for guidance about future probabilities of claims, I had to make assumptions about the rate of change in the future."

"That's when I started to see climate change in a completely different light, and be quite shocked by it - because it affected me personally, it could cause the contract to lose money and make me look stupid."

Microinsurance

Microinsurance protects the poor against risk in exchange for premium payments tailored to their needs, income and level of risk.

Agrotosh Mookerjee, GI actuary, has been involved in microinsurance since 2008 as a researcher and a consultant. He has advised on crop and health microinsurance projects in India and on crop microinsurance in Ethiopia. Since Sept 2011, he has been working as a Fellow of the International Labour Organisation (ILO), a specialist UN agency, in Bangladesh. His work is helping to provide insurance where it is most needed in developing countries.

"Environmental issues are particularly relevant for the poor in developing countries and affect their risk profile," Mookerjee explains. "To the extent that microinsurance can be used to manage the risks faced by the poor, these environmental issues and climate change should be of concern to microinsurance consultants. Weather-indexed crop microinsurance is potentially a powerful tool in managing the risks faced by poor farmers in developing countries."

"As a consultant for crop microinsurance in Africa, I have to work with satellite and weather station data to price and design products and processes. The analysis includes traditional actuarial techniques as well as meteorological mathematics. The challenge is to design and price a product that farmers understand and value and which can be implemented and insured on a sustainable basis. I have also worked for disaster microinsurance, including flood and fire coverage, where changing weather patterns are relevant." 

Sustainable and Green Investment

Sustainable Investment incorporates environmental, social and governance (ESG) factors into investment analysis and decision making.

Green investment relates to direct investment in initiatives with positive environmental impact e.g. renewables, resource efficiency and reforestation. Pension fund investment is an ideal match for those green investments that require relatively high upfront investment followed by a long payback period. However, green investment is still relatively marginal as market incentives are heavily weighted towards other investments.

Actuaries are well placed to take the lead in advising trustees and other clients on these issues.
Nick Silver, consultant and pension fund advisor, is involved in the UK Government's Capital Markets Climate Initiative (CMCI) which aims to mobilise investment in developing countries for climate adaptation and mitigation. Nick is also a co-founder of the Climate Bonds Initiative (CBI), which is a not-for-profit organisation aiming to mobilise investment at scale into a low carbon economy, such as renewable energy and energy efficiency.

The CBI proposed the idea of the Green Investment Bank to the Government, which will be established later this year.

Energy Consulting

Perhaps, you would not expect to find actuaries working in energy consulting. However, it is not that great a leap, as actuaries are skilled in evaluating uncertain future events and their long-term financial consequences. These skills are a natural fit with energy consulting, including renewables and nuclear power projects which involve major investments and very long projections.

The UK Department of Energy and Climate Change (DECC) recently consulted on changes to the regulatory regime which governs the procedures for the approval of the funding for nuclear decommissioning and waste disposal for new nuclear power stations.

Paul Meins, actuarial consultant, reflects on potential roles for actuaries:

"Where might actuaries work? Perhaps with potential power station operators in developing their funding plans, perhaps acting as independent regular financial verifiers of funds established for decommissioning and waste disposal, and also acting for DECC in reviewing funding plans and subsequent changes. Indeed, the Nuclear Liabilities Financing Assurance Board, an independent body established by DECC to advise them on the financial arrangements for decommissioning submitted by operators, already includes actuaries."

Actuarial Profession


The global Actuarial Profession is supporting actuaries in understanding the latest in climate change science and developing actuarially-sound approaches to managing the potential implications of climate change risk factors.

The International Actuarial Association has established an Environmental Working Group devoted to environmental issues that could affect the work of actuaries.

In the UK, the Actuarial Profession's Resource and Environment Group is currently engaged in a number of initiatives including Limits to Growth research. This research has been commissioned by the Profession to investigate possible actuarial implications of the slow-down or cessation of global economic growth.

In the US and Canada, the Climate Change Committee, a joint effort of the American Academy of Actuaries, the Canadian Institute of Actuaries, the Casualty Actuarial Society and the Society of Actuaries is making a difference. Work is progressing on the Climate Change Index project due to be completed this year. The index is intended to be a resource for actuaries and others in developing predictive models for potential climate change related losses or opportunities and for risk management strategies.

The Institute of Actuaries of Australia has been actively involved with climate change issues for many years, through their work with general insurers, public policy development work and in a variety of research and education activities.

Conclusion

In conclusion, actuaries are already making a positive impact.  However, there is a lot more to be done, which can only be accomplished with our active participation.

Here is some advice on getting involved:

Oliver Bettis says, "There is a huge amount that needs to be done in building a sustainable financial system, and we actuaries are well placed to play a leading role in this. Building up experience in this field now could pay dividends later on."

"I have also learned that it is perfectly possible to work a normal day job as a pricing actuary and make valuable contributions as a volunteer. The work I've done for the profession, as a volunteer in the Resource and Environment Group, has been the most satisfying I've ever done. I've met very interesting people, and made many friends doing this work. This is one of the things that make me optimistic for the future."

Agrotosh Mookerjee adds, "The challenge is getting basics right, which is often trickier than building complicated actuarial models! Get involved in operational and "non-actuarial" areas as well, as there is a lot of value actuaries can add to these areas in microinsurance. Be prepared to solve problems with very inadequate data  using judgement and have lots of fun - it may turn out to be the most fulfilling and exciting experience of your actuarial career!"

For further details on the Resource & Environment Member Interest Group please visit http://www.actuaries.org.uk/members/pages/resource-and-environment-member-interest-group.

By-line: Therese Kieve is a life actuary and a member of the Managing Committee of the Actuarial Profession's Resource and Environment Group
This article appeared in our August 2012 issue of The Actuary.
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