The third instalment of our Climate Change Blog summarises news relating to physical risk – an area which is never out of the news for very long. David Hudson covers crop insurance, increasing rain storms in Australia, floods, and physical risks in banking and much more.
Welcome to the third instalment of the Climate Change Blog, an article series that aims to cover news and events related to climate change and relevant to actuaries and the industries they advise.
This series is brought to you by the Institute’s Climate Change Working Group.
Look out for upcoming instalments in this series where we will be showcasing the Global Climate Action Summit and other initiatives of the United Nations, as well as the Australian Actuaries Climate Index (launching in November).
In this edition:
- What’s physical risk?
- An Insurance Executive Explains Why the US Needs a Carbon Tax
- Tropics Region Expansion
- Australia Facing Increased Intense Rain Storms
- IGCC Climate Resilience Guide for Investors
- Great Barrier Reef Health Check
- IAIS Issues Paper Released
- Crop Insurance Study
- Last Week Tonight – Floods
- Physical Risks in Banking
- EBRD Report on Advancing TCFD Guidance
- Recent climate change articles by members of the CCWG
What’s physical risk?
Physical risk is the risk of financial loss as a result of extreme weather events that increase in frequency, intensity and impact due to the effects of climate change. This includes sea level rise, flooding, hurricanes, droughts and wildfires.
As outlined in the Taskforce on Climate-Related Financial Disclosures, physical risk can be event-driven, including the increased severity of extreme weather events or it can take the form of chronic physical risks over the longer-term such as sea level rise or increased temperatures.
A wide range of organisations are exposed to climate-related physical risks, such as those with long-lived, fixed assets; locations or operations in climate-sensitive regions and reliance on availability of water. Physical risk scenarios generally identify extreme weather threats of moderate or higher risk before 2030 and a larger number and range of physical threats between 2030 and 2050.
The Task Force believes that all organisations exposed to climate-related risks should consider scenario analysis to help inform their strategic and financial planning processes and disclosure of internal sensitivity tests to a range of climate-related scenarios. The measurement and analysis of the financial impacts of these risks and the long duration of the problem uniquely lends itself to an Actuary’s unique skills.
An Insurance Executive Explains Why the US Needs a Carbon Tax
Kicking off the latest round of news around climate risk we have an opinion piece from the former CEO of State Farm Insurance in the New York Times. In the article, Professor St Edward B. Rust Junior points to newly released figures from the Actuaries Climate Index to advocate for a Carbon economy structure. With record hurricane seasons fast becoming the norm and sea levels rising, Professor Rust warns that insuring against property losses will become more difficult and more expensive.
“As an insurance professional with over 40 years of experience, I learned quickly that when actuaries warn about risks, you listen.”
Professor St Edward B. Rust Jr., Former CEO State Farm
Daily News: Waves slam the Oceana Pier and Pier House Restaurant in Atlantic Beach, North Carolina as Hurricane Florence approached the area. 15/9/2018
Tropics Region Expansion
Successful monitoring of this phenomenon could also present an opportunity to general insurers for more accurate pricing and setting of reserves into the future.
“It (the cyclone band) could be Brisbane to Sydney, Rome to London, by the end of the century,”
Professor Stephen Turton
Australia Facing Increased Intense Rain Storms
A group of scientists from Newcastle University (UK) and the University of Adelaide have published a paper in Nature Climate Change on the increased impact of short intense rainstorms in Australia, with implications for flash flooding in urban areas. In the article that can be found here, it states the largest increases from the expected figures are for the most extreme events.
“These changes are well above what engineers currently take into account when determining Australia’s flood planning levels”
Associate Professor Seth Westra, University of Adelaide
IGCC Climate Resilience Guide for Investors
The Investors Group on Climate Change (IGCC) has released a new guide for investors on climate risk tools for managing physical risk and investing in resilience. Initially developed in a workshop in 2016, its purpose is to provide a short and handy reference for investors on the basic concepts of climate resilience and highlight some tools and resources related to its management.
Great Barrier Reef Health Check
A recent report looks at the current health of the Great Barrier Reef and the outlook into the near future. The author also looks at the changing views of many tour operators from one of very public denial to realisation and fear for their livelihood.
“The realisation so much of the economy depends on the Reef – estimated to be worth more than $6.5 billion a year to the Queensland economy, and employing 64,000 people – can’t be ignored.”
Julia Leu, Mayor of Douglas Shire Queensland.”
IAIS Issues Paper Released
The International Association of Insurance Supervisors, which counts APRA as one of its members, and the Sustainability Insurance Forum, issues their final issues paper on climate change risks to the insurance sector. The paper, which can be found here, was written to raise awareness for insurers and supervisors of the challenges presented by climate change, including current and future supervisory approaches for addressing these risks.
Three key external developments driving APRA’s internal action were:
- The launch of the FSB Task Force on Climate-related Financial Disclosures
- The Paris Agreement on Climate Change
- Australian legal opinion on the legal duty of corporate Board with respect to climate change
Crop Insurance Study
A recent study from the United States researches the effect crop insurance has on the habits of farmer’s crop choices. It is part of the 2018 Farm Bill which is currently being finalised in Congress. The article, which can be found here, presents the case that in its current form, crop insurance is incentivising farmers to use too much water and select nutrient intensive crops. The moral hazard problem of farmers not being prepared against extreme weather is also analysed.
“Modifying crop insurance to reduce incentives for unsustainable farming practices could be an effective way to ensure the resilience of our future agricultural system.”
Don Fullerton, Gutsgell Professor of Finance, University of Illinois
Last Week Tonight – Floods
With the recent cost of Hurricane Florence still being calculated, here is a timely reminder of the importance of good product design. John Oliver’s episode on the federal system for financing flood recovery in the United States describes some unintended consequences of providing discounted, government-funded insurance to properties at high risk of flood.
Physical Risks in Banking
Sixteen leading banks convened by the UN Environment Finance Initiative (UNEP FI) and supported by climate risk advisory firm Acclimatise, have released new methodologies that aim to help the banking industry to understand and manage the physical risks and opportunities of climate change in their loan portfolios.
Using the methodologies, banks can begin to assess physical climate risks in their loan portfolios, evaluating the impacts on key credit risk metrics – Probability of Default (PD) and Loan-to-Value (LTV) ratios. The forward-looking assessments offer longer-term insights that go beyond the usual stress-testing horizon of 2-3 years.
Case studies from leading banks who piloted the methodologies are provided in the report.
EBRD Report on Advancing TCFD Guidance
Also in banking, the European Bank for Reconstruction and Development’s Report on Advancing TCFD guidance on physical climate risks and opportunities has been released. This report builds on and explores in more detail the recommendations of the Task Force on Climate-related Financial Disclosures. The recommendations have reiterated a growing concern of business leaders and investors over the physical impacts of climate change on the economy and financial markets.
Would you like to know more?
Recent climate change articles published by members of the Climate Change Working Group:
- Climate Change Blog – August 2018 by David Hudson
- Climate Change Blog – July 2018 by Evelyn Yong
- Climate Change Disclosure – Financial Institutions Feel the Heat by Sharanjit Paddam and Stephanie Wong
- Climate Related Financial Disclosures: The Way Forward? by Wayne Kenafacke.
- An Overview of the Actuaries Climate Index by David Hudson
- Climate Risk Management for Financial Institutions by Sharanjit Paddam, Stephanie Wong and Alison Drill
- TCFD Webinar: Climate Leadership – How to Support the TCFD
CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.