The primary aim of actuarial work is to identify and quantify threats to the insurance industry's long-term viability and financial sustainability. In order to perform their jobs as risk management experts, actuaries must understand the tangible effects of climate systems and changes. These effects will have an impact on how risks are underwritten, priced, managed, and reported in general insurance, life insurance, pensions, other financial institutions, and social security. Actuaries must recognize the magnitude of potential changes, as well as the uncertainty surrounding their frequency and magnitude, and the inherent volatility of such risks.

 

Climate change has become a much more prominent aspect of actuarial work, with climate change identified as a significant threat to insurance companies, affecting claim frequency, claim severity, investment returns, and business volume. Actuaries can no longer evaluate risks solely on historical data without considering the implications of climate change. Physical risks and transition risks are the two main modes through which climate change affects the financial system of the insurance sector. 

 

Physical risks are first-order dangers brought on by weather-related occurrences. These can then be further categorised into acute risks and chronic risks. Events that occur suddenly, like landslides and flooding, are considered acute risks. This may result in an increase in claim occurrences for the insurance provider, including property damage, business interruption, and hospitalisation claims. 

 

However, chronic risks are dangers that result from long-term factors like climate change and rising sea levels. The most recent report from the Intergovernmental Panel on Climate Change (IPCC), the Sixth Assessment Report, states that the average global temperature in 2020 was 1.09C higher than pre-industrial levels. The average sea level has increased by 0.2 metres worldwide since 1901. Long-term changes in sea levels may damage coastal infrastructure, increasing the number of claims related to property, while changes in temperature may have an impact on human health, increasing the number of claims related to medical care.

 

Transition risks refer to societal and economic responses to climate change. These can result from reputational risks, market risks, technology risks, policy risks, and legal risks. The importance of stranded assets in the investment portfolio is a common significant concern in the insurance sector. Insurance companies rely heavily on the investment performance of the premiums they collect because they collect them up front and pay claims later.

 

Actuaries are constantly trying to identify and quantify potential climate change scenarios. This is accomplished using both quantitative methods like actuarial loss modelling and stochastic modelling and qualitative methods in risk management to generate potential scenarios. As actuaries gain a better understanding and analysis of climatic changes, they are better able to recognise the long-term effects of climate change and develop mitigation strategies to ensure the long-term profitability and financial sustainability of insurance firms.