By John Coss
John is a retired actuary and vice-chair of Stockport Humanists. In this article he explains why actuaries are concerned with climate change. He reviews how the Institute and Faculty of Actuaries is engaging on global warming with Earth system scientists, from the perspective that climate change is a risk-management problem, and one of the most important goals of climate change policy should be to limit the probability of a very bad outcome to an acceptably low value.
Actuaries quantify investment, mortality and other risks to determine premiums and reserving requirements so as to maintain the solvency of insurance companies and pension funds. For some time, the consequences of climate change have been an important risk factor for many aspects of actuarial work, including both asset and liability issues in pensions and insurance, and they are becoming even more significant. As risk professionals, actuaries need to understand the physical impacts of climate systems and climate changes, which affect how risks are underwritten, priced, managed, and reported, whether for general, life or health insurance, pensions, other financial institutions, or social security.
The scientific consensus is that climate change associated with global warming is on-going, but the scale and timing of its impacts are uncertain. The effects of climate change could potentially have a wide-ranging impact on health and mortality, physical assets and financial markets, and key stakeholders (such as company boards and regulators) increasingly expect actuaries to consider their potential impact. This has prompted the professional actuarial bodies, including the Institute and Faculty of Actuaries (the IFoA) in the UK, to provide extensive guidance to their members about these issues, and to engage with Earth system scientists on global warming from the perspective that climate change is a risk-management problem, and one of the most important goals of climate change policy should be to limit the probability of a very bad outcome to an acceptably low value.
Policy briefings
The IFoA issued policy briefing on Climate Change: Managing Risk and Uncertainty in Nov 2015 and Jan 2022 which make the case for an actuarial approach to climate change. Here is the Summary from the 2022 briefing:
1. Climate action is urgent – Even if countries meet all their nationally determined contributions (NDCs) and long-term net-zero promises, global warming is estimated to reach 1.8C by 2100.
2. Climate-related risk represents a material financial risk – Firms increasingly face physical, transition and litigation risks from climate change and the move to a net-zero carbon economy. The direct and indirect consequences of climate and environmental changes are likely to impact claims experience and modelling assumptions.
3. The cost of delay is high – Failure to take timely action on emissions is likely to lead to more costly
and disruptive remedial action at a later date, as well as earlier and more severe climate impacts. Early action on emissions would improve future options and allow more time for more effective adaptation to future adverse climate impacts.
4. Private finance has a critical role in financing the transition to net zero – Finance should be used as a force for good through active stewardship and products that incentivise behaviour in line with global climate targets. The distinction between financial and non-financial factors in fiduciary duty should be removed to enable investors to factor in not only the impacts of social and environmental issues on their investments, but also the impact their investment decisions have on society and the environment.
5. Biodiversity risk must be treated as urgently as climate change – We are currently observing a 6th mass extinction event. Biodiversity loss represents a systemic risk to the economy, as regards both direct physical risks and transition risks. It both amplifies climate change and is amplified by it.
Actuaries are ideally placed to work with governments, business and other stakeholders to help better understand the long term consequences of climate change, and help develop policy options to respond to these risks. These include not only the long-term catastrophic risk to the world, but also the costs and risks to companies of transitioning to a low carbon environment which impact company results and are becoming subject to disclosure requirements.
Climate Change – A Risk Assessment
Actuaries provided input to Sir David King’s 2015 report: Climate Change – A Risk Assessment, which was commissioned by the Foreign and Commonwealth Office as an independent contribution to the climate change debate. More recently, the IFoA has published a series of reports, written jointly with Earth systems scientists, presenting actuarial perspectives on climate change.
Climate Emergency – Tipping the odds in our favour
The first of these reports: Climate Emergency – Tipping the odds in our favour – A climate change briefing for COP27 was published in November 2022, and jointly written with CCAG (Climate Crisis Advisory Group), founded and chaired by Sir David. His introduction to the report includes this observation:
The actuarial approach to risk analysis is different from that followed by most in the scientific community. Scientists are geared toward making predictions that are as accurate as possible. In contrast, actuaries are often concerned with predicting low-probability – high-impact events. A caricature of this is:
Science – we should not typically say that there is an iceberg until we are fully confident there is one present
Risk – there could be an iceberg, so we should typically steer well clear of it
Often complementing science, actuaries, alongside risk-analysis experts, have a direct and important contribution to make to the management of climate risks going forward.
The report concludes that:
Climate change is progressing faster than expected, with more severe impacts
Net-zero carbon budgets give only a 50% chance or less of limiting global warming to 1.5°C, which represents an unreasonable risk of not meeting our objectives
Multiple climate change tipping points, which may be irreversible, are likely to be triggered at 1.5°C
Tipping points mean there is even more uncertainty which we need to plan for by exploring tail risks and introducing prudence
In addition to rapid reduction, delivering a stable climate will require removing greenhouse gases from the atmosphere
It will be economically and socially positive to mitigate climate change. We have agency. Solutions are now scaling up and nature is a powerful ally. Policymakers must act decisively to accelerate the transition and ensure it is just.
The Emperor’s New Climate Scenarios
Three further reports have been published, all in partnership with the University of Exeter. The July 2023 report – The Emperor’s New Climate Scenarios – employs actuarial principles to examine the limitations and assumptions in relation to climate-change scenario modelling practices in financial services, focusing on hot-house world scenarios of 3˚C or more of warming. It demonstrates how current techniques exclude many of the most severe impacts we can expect from climate change, such as tipping points and second order impacts – they simply do not exist in the models, meaning the models understate the level of risk.
The report is discussed in this YouTube presentation which also covers Five Times Faster: Rethinking the Science, Economics, and Diplomacy of Climate Change (2023) by Simon Sharpe. The comments on this presentation make interesting reading.
Climate Scorpion - the sting is in the tail
The third report from the IFoA on climate change was published in March 2024 – Climate Scorpion – the sting is in the tail builds on the earlier work on climate change tipping points and climate scenarios to explore two critical issues:
how much hotter will the world get, and by when?
what are the implications for society and how do we manage these risks?
The report argues that the actuarial approach to the long-term financial solvency of insurance companies and pension funds provides a logical framework to look at climate change, so as to protect citizens from the ruin of their environment. A useful overview is available in this YouTube presentation by Sandy Trust, the lead actuarial contributor, which includes a number of slides depicting some of the many graphics which illuminate the ideas developed in the report.
The adjacent figure – from page 11 of the report – illustrates the general form of the probability distribution of the claims of an insurance company, derived from scenario modelling. It may be reasonable to base insurance premiums on the ‘mean’ but capital requirements should take account of more adverse outcomes. In practice, to ensure solvency except in the event of extreme losses, UK insurance companies are required to hold capital sufficient to meet losses at the 1 in 200 level (so that the probability of losses at this level or higher is 1 in 200).
Section 1 of the report advocates a similar focus on the ‘tail’ when looking at climate change, adapting financial services techniques to assess and communicate climate risks more effectively to policymakers, supporting long-term policy decisions, and introduces the concept of Planetary Solvency. Here is a brief synopsis of the remainder of the report:
Section 2 – The sting in the tail – expected warming, extreme events, climate overshoots and uncertainty – explores the difficulties in estimating the future rate of global warming, and the risk that it could be faster than currently projected.
Section 3 – Risky business – exploring the interconnectivity of risks – considers the complex basket of interconnected risks that could threaten the basis of our society and economy: failure to consider these interactions will underestimate risk. It explores how climate change is a driver for four systemic risks – emerging infectious diseases, food insecurity, water security, and extreme heat stress, using a hazard, exposure, vulnerability and response model.
Section 4 – Management actions for a stable climate – considers how to develop a planetary solvency risk assessment approach to climate change, which if implemented would probably lead to radically different climate policies. It recommends:
1. Carrying out a realistic risk assessment of climate change as a matter of urgency, and acting on it
2. Educating and taking action to accelerate positive tipping points in the economic system
3. Developing a Planetary Solvency framework to support human prosperity, now and in the future
Planetary Solvency
Planetary Solvency is defined as ‘managing human activity to minimise the risk of societal disruption from the loss of critical support services from nature.’ The latest IFoA report, ‘Finding our balance with nature: introducing Planetary Solvency’, was published in January 2025, and is discussed in this Guardian article. The IFoA announced its publication in an introduction by Sandy Trust to the concept of Planetary Solvency and why it is essential for future prosperity: it provides a link to the full report. Sandy has been the lead in developing the IFoA approach to climate change: he discusses this and why he became interested in climate change in this interview from The Actuary: https://www.theactuary.com/2025/01/09/amber-alert-introducing-planetary-solvency (Note: to access this link you may need to enter it into your browser.)
Asked how he remained optimistic, in the face of all the realities of climate change, he responded:
‘What makes you think I am optimistic? We face incredibly serious risks to our global civilisation that are not broadly appreciated, and it is going to get a lot bumpier than most people anticipate. However, I am optimistic that we can move much more quickly than we think to decarbonise.’ This is broadly my view too, and I share the view of Martin Rees, the Astronomer Royal, in Our Final Century, that humanity faces a number of existential challenges, including climate change and loss of biodiversity, and there is a significant risk that civilisation will not survive beyond this century.
The report develops a methodology for adapting actuarial risk and solvency management techniques to the problem of continuing to enjoy the benefits of a stable Earth system. And it creates a Planetary Solvency risk dashboard which leverages the detailed understanding of the Earth system provided by science but has risk-led communication, synthesising the science and creating an impact scale. It includes an interesting introduction to RESILIENCE principles, designed to support effective and realistic Planetary Solvency risk assessments, illustrated in the diagram and table below.
Key findings
The key findings of the report, presented under the following headings, make sobering reading:
Critical Observations:
1. We are part of the Earth system, which we depend on
2. The stability of the Earth system is threatened
3. Unmitigated climate change and nature-driven risks have been hugely underestimated
4. Paris Agreement goals were not informed by realistic risk assessment, they implicitly accept high risk of crossing tipping points
5. Global risk management practices for policymakers are inadequate, we have accepted much higher levels of risk than is broadly understood
Recommendations to mitigate risk:
1. Implement Planetary Solvency assessments
2. Set Planetary Solvency limits that respect planetary boundaries
3. Enhance governance structures to support Planetary Solvency
4. Build policymaker capacity on systemic risk management
Note
A shorter version of this article appeared in the January newsletter of Humanist Climate Action, which provides a mix of news and views on climate issues of interest to humanists.
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