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The Actuary The magazine of the Institute & Faculty of Actuaries
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Student page: A new breed

George Burton makes the case for the resource and environment-focused actuary


11 JULY 2019 | GEORGE BURTON 


Student


If you are working your way through Curriculum 2019 and forever explaining that CM1 isn’t a postcode, pause for a second. Have you ever considered what it would take for an entirely new module to make it onto the syllabus? Are the so-called specialist principles merely ‘general’ insurance sub-sections? Could we see ourselves attending Resource and Environment tutorials? 

For a Resource and Environment module to make it onto the syllabus, it would need to meet the basic requirements: it must develop technical knowledge, provide a grounding in business and economics, and challenge communication skills. There also needs to be a strong case for it.

Given the myopic financial reporting cycles of the corporate world, it’s not unsurprising that environmental, social and governance (ESG) issues aren’t always top of the agenda. However, if we can learn anything from the recent global phenomenon of direct-action climate protests, it’s that these concerns aren’t going to go away quietly. 

Perhaps the most noticeable features of climate change are its intangibility and long-term uncertainty. Sounds like familiar territory for the actuary, right? Climate change and extreme weather phenomena are no longer considered ‘black swan’ events – occurrences that deviate beyond the normal expectations of a situation and are consequently extremely difficult to predict. Catastrophe modelling is emerging as a relatively new discipline, focused on the convergence of property insurance and the science of natural hazards. This modelling is at the centre of the ‘big data’ revolution, guiding portfolio risk exposure reinsurance purchases. With a multitude of higher order interactions, the impacts of climate change are difficult to quantify. Nonetheless, it’s certainly worthy of consideration. The old adage ‘all models are wrong, but some are useful’ springs to mind. 

Key risks include stranded assets and transition risks. Stranded assets are those that have suffered premature write-downs or devaluations, while transition risks occur where we experience large changes in asset values and/or a higher cost of doing business as we move to a greener economy. 

Increased likelihood of extreme weather events and associated pay-outs are a safe bet. Many major insurance companies now have dedicated – albeit not fully integrated – sustainability teams. In 2018 alone, the impact of natural disasters was estimated at around $160bn USD, only half of which was insured. The industry is also attempting to provide progressive solutions. The Swiss Re parametric trust-fund insurance solution to protecting the Mesoamerican coral reefs doesn’t stand alone.

Insurance premiums don’t make moral judgments, but investments do. Most financial institutions support phased divestments from companies that are involved in high-risk industries – pushed by societal demand for increased investment transparency. Expect policyholder pressure to extend this phenomenon into the environmental realm. Voluntary agreements such as the Financial Stability Board’s Task Force on Climate-related Financial Disclosures underline industry efforts to meet these demands.

Statutory requirements require product risks to be clearly communicated to policyholders. How will we incorporate the complexity of environmental assumptions into the policyholder’s reasonable expectations for investment returns? If the actuarial profession is about ensuring our futures, then there is arguably a moral imperative to be a responsible steward of the environment. For those still unconvinced by this challenge, the reputational risk of inaction may win them over. 

So when will we be attending our first Resource and Environment tutorials? The International Actuarial Association’s education syllabus states that students should be able to “describe the major factors affecting the development of financial systems… including climate change”. While there is a little way to go when it comes to the industry’s technical understanding, and increased transparency is creating a new communication challenge, the business case is all but mainstream. I suspect the resource and environment actuary is unlikely to be facing a mass extinction – but only time will tell whether they will end up as a stranded asset or become part of a broader change in climate.

George Burton is a guest student editor

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