Extreme climate events threaten many aspects of life and business. As these events become more common, the world has become more uncertain than ever. In a climate crisis, there won’t be a mythical superhero to save the day. Instead, we’ll hopefully witness the concerted effort of dedicated people around the globe who apply their skills and passion to making a difference. This will include professionals across many sectors, and we can be sure that actuaries who analyze insurance risks will be counted among them.
The framework developed by the Task Force for Climate-related Financial Disclosures (TCFD) extends further into regulatory and financial filings. Although climate risks may focus mostly on property and casualty insurance, climate also affects and intersects with health, retirement financial planning, InsurTech, corporate risk management and more.
Looking at the numbers, the challenges become increasingly clear.
By 2050, annual wildfire property loss could see a 125 percent increase across the Western United States, according to the "business-as-usual" climate scenario cited in the U.S. Wildfire Risks Report by the Society of Actuaries (SOA) Research Institute. This analysis includes a possible 300 percent property loss increase in Colorado.
Meanwhile, the SOA Research Institute report on U.S. Flooding Risks finds that under this same climate scenario, by 2050, the contiguous United States could experience a 49 percent increase in annual asset losses from flooding caused by intense rainfall, and the frequency of 100-year floods could increase and become 50-year events.
Already, the impacts of climate risk are upon us. The SOA Research Institute’s Actuarial Weather Extremes report from December shows 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 largest since 1980, topped by $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’s best to recognize doing so will be an evolution.
Extreme weather events also are linked to adverse health effects, such as significant increases in heat-related injuries due to heatwaves. In addition to physical risks, climate change also leads to transition risks in areas such as consumer behavior (away from fossil fuel production and use) and investor sentiments.
Developing climate-related disclosures
Disclosures are one of the tools actuaries use for assessment, and the TCFD is one of the most prevalent internationally. The SOA Research Institute recently released 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’s best to recognize doing so will be an evolution. However, because the impacts of climate change are increasing, it’s important that companies don’t delay. These four pointers may help an organization get started:
- Understand there are numerous ways to tell a climate-risk story. Annual reports, The National Association of Insurance Commissioners surveys, sustainability reports, CDP responses, TCFD indices and standalone TCFD reports are six ways to communicate your company’s climate pathway, and there are pros and cons to each. Climate disclosures are a reliable way to demonstrate progress on climate-related activities, and vigilant reporting enables compliance with regulation, top scores from ratings agencies and satisfied investors.
- Conduct a gap assessment. What is the organization doing to assess climate risks that could be built upon? What information is lacking currently?
- Assess risks and opportunities qualitatively. Develop a meaningful understanding of how climate change might affect the organization’s business.
- Conduct quantitative assessments. Finally, move to more sophisticated quantification of risks and opportunities, which is what investors, regulators and other stakeholders ultimately expect.
The pace of climate change makes the assessment, analysis and management of climate risks more necessary than ever, and recognition of that need is growing. For example, researchers working on the TCFD Best Practices report spoke with employees of four insurers in life and property and casualty in the United States and Canada that have implemented the TCFD framework. Insurers expressed that it was useful to compare their climate disclosure against that of peers to either help guide the direction of new reports or to help make the case to their management of why they should be disclosing certain metrics. Support for the framework from investors and regulators, along with the new requirements from the SEC and NAIC, has fostered progress within organizations regarding climate strategies, making TCFD more widespread. Actuaries’ role in preparing these disclosures is nothing short of vital.
