Climate Risk Modelling: Actuarial Approaches for Uncertain Futures

The Climate Challenge for Actuaries

Climate change represents one of the most significant challenges facing the insurance industry. Unlike traditional risks with decades of historical data, climate risks involve projecting into unprecedented futures where past experience may be a poor guide. This creates fundamental challenges for actuarial practice.

Physical Risk Assessment

Physical risks from climate change affect both life and non-life insurers. For non-life business, the increase in frequency and severity of weather-related events requires fundamental reconsideration of catastrophe modelling approaches. Traditional models calibrated to historical experience may significantly underestimate future losses.

For life insurers, climate change affects mortality and morbidity through multiple pathways: heat-related deaths, respiratory conditions from air pollution, vector-borne diseases, and the health impacts of climate anxiety. Quantifying these effects requires collaboration between actuaries, climate scientists, and epidemiologists.

Scenario-Based Approaches

Given the deep uncertainty involved, scenario-based approaches are essential. The Network for Greening the Financial System (NGFS) has developed a set of reference scenarios that are increasingly being used by insurers:

Practical Modelling Considerations

Time Horizons

Climate impacts materialise over different timeframes. Near-term physical risks are already embedded in current weather patterns, while long-term risks require projection over decades. Actuaries must consider how these different time horizons align with their liability profiles.

Model Uncertainty

Climate models carry significant uncertainty, particularly at regional scales relevant to insurance portfolios. Actuaries should use ensembles of models and explicitly communicate the uncertainty ranges in their results rather than presenting false precision.

Adaptation and Mitigation

Models should allow for adaptation measures that may reduce exposures over time, as well as mitigation actions that affect the trajectory of emissions. Static assumptions about future exposures are unlikely to be realistic.

Regulatory Expectations

Regulators are increasingly expecting insurers to demonstrate understanding and management of climate risks. The ORSA should include climate scenarios, and boards should be able to articulate their organisation's climate risk exposure and management approach.

How Wizard and Company Can Help

We can help you develop practical approaches to climate risk assessment, from initial exposure analysis to integration into reserving and pricing. Our experience spans both life and non-life sectors, enabling us to take a holistic view of climate impacts across your business.