International Actuarial Association releases third paper in climate risk series

This week, the International Actuarial Association (IAA) released the third paper in a series on climate risk entitled Climate-Related Scenarios Applied to Insurers and Other Financial Institutions. It was developed by the IAA Executive Committee Task Force on Climate Risk (CRTF) and reflects a significant contribution from the Actuaries Institute, both in terms of volunteer effort and content.

I was privileged to be lead author on the paper and was greatly assisted by co-author Evelyn Yong. Fred Rowley also provided valuable advice and guidance. Fred and I serve on the CRTF and have been active in IAA work for many years, while this project was Evelyn’s first with the IAA. The paper draws significantly from Australia’s world-leading efforts in climate risk, as noted below. The paper is the third of a series of seven designed to discuss climate risk from an actuarial perspective. The first paper, Importance of Climate-Related Risks for Actuaries, and the second paper, Introduction to Climate-Related Scenarios, were released in September 2020 and February 2021, respectively.

The latest paper is divided into six sections and is accompanied by a glossary:

  • Sources of Information and Considerations for Reporting Financial Effects covers sources of information that may be used to support the development of specific estimates of changing weather from general climate scenarios, construction of scenarios for transition and legal/reputational risks, and considerations for reporting financial effects to external stakeholders. The Australian Climate Measurement Standard Initiative (CMSI) is reviewed in detail, along with examples of scenario analysis initiatives from the European Union, France, and the United Kingdom.

  • Actuarial Considerations reviews actuarial guidance from several global actuarial associations. The Institute’s Climate Change – Information Note for Appointed Actuaries is extensively cited as an example of information on how actuaries should consider climate risk in their work.

  • Considering Interactions and Systematic Issues presents the concepts of systems thinking and systems dynamic modelling, to illustrate the importance of considering the broad environment in which a firm operates.

  • Updating Scenarios and Integration with ERM Frameworks reviews how scenarios can be updated over time and outlines considerations for integrating scenarios within enterprise risk management (ERM) frameworks.

  • Case Studies presents several case studies of scenarios for physical and transition risk.

  • Next Steps discusses the CRTF’s future papers to be produced over the next several years:
    • The application of climate-related risk scenarios to asset portfolios.
    • Climate-related risk management and addressing emerging third-party regulatory/reporting/disclosure requirements.
    • The potential effects of transition and adaptation steps.
    • The link between climate-related risk scenarios and social security.

 

The CRTF will host a webinar on 29 September 2021 at 10:00pm AEST to present this paper. Evelyn and I will be presenting at the webinar, along with co-author Eric Dal Moro of Switzerland. Click here to register.

On another international publication note, I recently published an article in the Society of Actuaries’ magazine The Actuary entitled More Than Global Warming – Putting climate change in context, which discusses how managing climate risk is part of a broader discussion of sustainability.

CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.

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