Linking Climate Risk, Compliance and Actuarial Science

This summer, my compliance intern is an actuarial science major. In several instances, both she and I have been asked, "Why would an actuarial science major?choose the area of compliance for their summer internship at an insurance company?"

The urgency to address climate change and environmental concerns has led businesses to recognise the importance of understanding and managing climate-related risks. Actuarial science, the discipline that assesses and manages risk, is at the forefront of understanding and?quantifying the impact of climate risk. Equally, a comprehensive climate risk assessment is crucial to a company's long-term success as extreme weather events, regulatory changes, and shifting consumer preferences become more?prevalent. Therefore, the risk and compliance space that includes Enterprise-wide Risk Assessments is a perfect opportunity for a budding actuary to be trained.

This article examines,?in brief, how actuarial science?is being influenced by climate risk and how climate risk assessments can contribute to sustainable growth and resilience.

Understanding Climate Risk:

Increasing temperatures, changing precipitation patterns, and more frequent and severe extreme weather events are all proven contributors to climate risk. According to disaster management specialist Dr Trevor Johnson, “From a disaster management and Bahamian perspective, climate risk refers to the potential financial, economic, and societal impacts resulting from climate change-related factors such as increasing temperatures, changing precipitation patterns, and more frequent and severe extreme weather events.”

Impacts of Insurance:

Insurance companies acutely feel the effects of climate change as risk transfer entities. Changing weather patterns, such as more frequent and severe storms or droughts, can increase property damage, crop losses, and natural disaster claims. Long-term liabilities, such as life insurance policies, are also affected by climate change since actuarial assumptions must account for increased mortality rates and more significant life expectancies.

Evolving actuarial models:

Climate risk is being addressed by the insurance industry with new models that go beyond traditional approaches. Rather than considering the multiple broader impacts of climate change as a whole, actuaries collaborate with scientists to include climate projections in risk assessments. Machine learning and artificial intelligence are used to simulate climate change scenarios. Insurers' understanding of risk, underwriting decisions, and pricing structures are enhanced due to using these integrated climate projections and scenario analyses in their risk assessments.

The competitive edge through climate risk assessments:

Staying ahead of industry peers by completing a climate risk assessment gives companies a competitive edge. Proactively addressing climate risks can position businesses as leaders in their industries, attracting top talent, fostering partnerships, and attracting investors. Incorporating climate risk management into corporate strategies demonstrates a company's ability to adapt and thrive in a rapidly changing environment. As a result of this forward-looking approach, businesses can leverage emerging opportunities, respond to the changing dynamics of the market, and outperform their competitors.

In short, the intersection of actuarial science and climate risk assessment presents?a unique opportunity for aspiring actuaries to contribute to sustainable growth and resilience. Climate-related risks are becoming more important as businesses address climate change. Actuaries, along with risk and compliance professionals, are crucial to understanding climate risk impact on organisations. As a result of proactive climate risk management, companies can adapt, thrive, and capitalise on emerging opportunities. In this writer's opinion, an actuarial science major who chose the area of compliance for their summer internship is proactive as well as the company that facilitates the opportunity.