Extreme weather events threaten many aspects of life and business. As these events become more frequent, the world has become more uncertain than ever. In a climate crisis, there will be no mythical superheroes to save the day. Instead, we hope we see the concerted effort of dedicated people around the world applying their skills and passion to make a difference. This will include professionals from many industries, and we can be sure that actuaries who analyze insurance risk will be counted among them.
The framework developed by the Task Force for Climate-related Financial Disclosures (TCFD) extends further to regulatory and financial filings. While climate risk may focus primarily on P&C insurance, climate also affects and intersects with health, retirement financial planning, InsurTech, enterprise risk management and more.
Looking at the numbers, the challenges become increasingly clear.
By 2050, annual property losses from wildfires could increase by 125% in the western United States, according to the “status quo” climate scenario cited in the U.S. Fire Danger Report by the Research Institute of the Society of Actuaries (SOA). This analysis includes a possible 300% increase in material losses in Colorado.
Meanwhile, the SOA Research Institute report on Flood risks in the United States finds that under this same climate scenario, by 2050 the contiguous United States could experience a 49% increase in annual asset losses from flooding caused by intense precipitation, and the frequency of 100-year floods could increase and become events of 50 years.
Already, the impacts of climate risk are upon us. The SOA Research Institute Actuarial Severe Weather Conditions A December report points to 20 “billion-dollar disasters” in the United States in 2021, with a total of $145 billion in damages. Last year’s total cost was the third highest since 1980, topping $244.3 billion in 2005 and 2017, which holds the record at $346.1 billion.
When an organization embarks on disclosing its climate risks based on the TCFD framework, it is best to recognize that this will be an evolution.
Extreme weather events are also linked to adverse health effects, such as significant increases in heat-related injuries from heat waves. In addition to physical risks, climate change also brings transitional risks in areas such as consumer behavior (away from fossil fuel production and use) and investor sentiment.
Developing climate-related information
Disclosures are one of the tools actuaries use for valuation, and the TCFD is one of the most widely used internationally. The SOA research institute recently published a TCFD Best Practices report that reviews this framework and emerging practices.
When an organization embarks on disclosing its climate risks based on the TCFD framework, it is best to recognize that this will be an evolution. However, as the impacts of climate change increase, it is important that companies do not delay. These four tips can help an organization get started:
- Understand that there are many ways to tell a story about climate risk. Annual Reports, National Association of Insurance Commissioners Surveys, Sustainability Reports, CDP Responses, TCFD Indexes, and Standalone TCFD Reports are six ways to communicate your company’s climate trajectory, and there are advantages and disadvantages for each. Climate information is a reliable way to demonstrate progress in climate-related activities, and vigilant reporting drives regulatory compliance, top ratings from rating agencies and satisfied investors.
- Perform a gap assessment. What is the organization doing to assess the climate risks on which it could rely? What information is currently missing?
- Qualitatively assess risks and opportunities. Develop a meaningful understanding of how climate change could affect the organization’s business.
- Perform quantitative assessments. Finally, move on to more sophisticated quantification of risks and opportunities, which is what investors, regulators and other stakeholders ultimately expect.
The pace of climate change makes climate risk assessment, analysis and management more necessary than ever, and recognition of this need is growing. For example, researchers working on the TCFD Best Practices report spoke with employees of four life and P&C insurers in the United States and Canada that have implemented the TCFD framework. Insurers have indicated that it is useful to compare their climate disclosure to that of their peers to help guide the direction of new reports or to help explain to their management why they should disclose certain metrics. Support for the framework by investors and regulators, as well as new requirements from the SEC and NAIC, have spurred progress within organizations on climate strategies, making TCFD mainstream. The role of actuaries in preparing these disclosures is simply vital.