Actuaries Have Crucial Role To Play In Helping Insurers Deal

Hamilton, Bermuda – Climate change is a topic at the forefront of many minds, and actuaries have a crucial role to play by helping the insurance and reinsurance industry better understand related risks and how to price for them, attendees at the CAS Seminar on Reinsurance were told.

Douglas Collins, consulting actuary, Towers Perrin, said: “There are important ways actuaries can contribute to the debate about climate change, from helping our employers and our industry understand the risks to quantifying the pricing and risk management implications.”

Collins noted that the Casualty Actuarial Society recently created a new committee to address climate change issues in partnership with the scientific community.

“The committee has a broad charge, which includes educating our members and stakeholders, encouraging research that we can use, and assessing the potential risk management implications for the insurance industry,” he said.

Collins observed that property/casualty insurers and reinsurers are likely to see effects of climate change across many aspects of their business.

“The first thing that comes to mind for our industry is property claims, particularly for wildfire, flood, and drought. These are likely to be increasing risks under a warming world.

“For the reinsurance community probably the biggest concern would be wind, especially hurricanes and tropical storms if climate change causes increased frequency and/or severity,” he said.

On the casualty side of the business, Collins noted there is some litigation activity affecting D&O liability related to proper disclosure and assessment of climate risks, and also potential environmental liability claims against customers in the energy and automobile industries. “This is an area to watch,” he said.

Climate change may also impact insurers’ and reinsurers’ expenses because of the costs involved in responding to requests by regulators and rating agencies, as well as the costs of becoming “green” (environmentally responsible) companies.

Collins said the industry is already developing and underwriting new products designed to encourage green behavior, such as pay-as-you-drive auto insurance and discounts for drivers of hybrid cars.

Climate change may also impact investment strategies as companies decide whether to support technologies that are environmentally friendly.

“The bottom line is that the insurance and reinsurance community can handle worsening climate because by definition it is a long-term phenomenon. What will challenge us as an industry are aspects of climate change that may not be considered by our models, particularly if we see more frequent severe property events or significant liability claims,” Collins added.

Katharine Hayhoe, research associate professor in the Department of Geosciences at Texas Tech University, told attendees that the climate today is changing in ways that cannot be predicted by the past.

“If we only consider natural factors, we cannot explain how climate has changed over the last 50 years, nor can we predict what will happen over the rest of this century. For the first time in history, humans have actually taken over the reins.

“That’s not to say there aren’t natural factors that still affect climate -- there certainly are -- but when one term in that equation gets much larger than the rest, it dominates. And that is what we are seeing with the human influence on climate,” she said.

 According to Hayhoe, this means that the amount of change expected over the rest of the century depends on the choices we make today. “Some degree of future climate change is inevitable,” she said, “because of the heat-trapping gases we have already put into the atmosphere. But by making smart choices that limit future production of heat-trapping gases, the most severe consequences of human-induced climate change can be averted.”

In terms of the impacts of climate change, a major area of uncertainty is how climate will affect hurricanes. “If I look at all of the areas in which climate change may affect us and pick the top three most uncertain areas, hurricanes would be on that list,” she said.

Hayhoe said the more you look at the connections between climate change and hurricanes, the more uncertainty there is.  She gave the example of warming oceans. “There is no question that ocean surface temperatures have warmed. This is a concern because it means we are increasing the amount of energy available to tropical cyclones or hurricanes.

“If this were the only thing we were looking at we would expect there to be more powerful hurricanes.”

However, she said a number of other factors need to be considered that may affect the frequency and severity of storms, including the impact of El Niño events and vertical wind shear.

“In any given year there are factors that act to decrease the frequency and intensity of hurricanes and there are other factors that increase that,” Hayhoe added. “But there are many other areas where we are very certain about the direction of change.”

Other climate changes that scientists are certain about include higher temperatures, more temperature swings, rising sea levels, and more flooding. Such events can increase claims for insurers, she noted, affecting coastal and urban infrastructure, human health and welfare, and energy use and the economy.

The session was moderated by David Na, consulting actuary, Towers Perrin.  The Reinsurance Seminar was held May 18-19 in Bermuda.
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