An actuary and the climate change elephant
The impact of climate change is increasingly becoming evident, with imminent restrictions on the assets backing liabilities as the world rallies towards green energy. The 'rare events' now occur more frequently, pushing claim amounts to the roof. Meanwhile, the conversion from carbon-intensive to 'greener' assets may be a ticking bomb.
Limited availability of 'green' assets may pull the asset-side of the balance sheet to the floor, as demand escalates their prices, increasing market risk exposure.
Can the actuary therefore be allowed to mismatch and invest in more high-return investments, to generate higher returns that are to be re-injected back in the future, as a cushion against climate change? Or should the actuary apply a risk-loading factor on the reserves needed against the uncertain climate-related outgo?
Mismatching, arguably, would be unacceptable, as it exposes the company to increased market risk. Mismatching would require a mismatching reserve, which 'locks' the capital that would have otherwise been used elsewhere, and the additional risk taken may jeopardise the solvency position of the company.
The actuary needs to recalibrate their models to depict the increased frequencies in catastrophes. Companies should also invite academics through research grants to study the evolution of climate change. The research should be done in line with the company's strategic plan and risk appetite.
The cost of climate change may be costed by the actuary and applied as a loading to new and possibly existing policies, to reduce the company's capital strain. The monies may be earmarked for procuring 'greener' assets, and adding to existing margins.
The extent to which this can be implemented, as well as the implementation procedure, would be an actuary's judgment. However, the need to cost for the effects of climate change is undoubtedly urgent.
20 February 2017