4 Emerging Environmental Risks Actuaries Need to Know
In the face of evolving environmental challenges, we turned to four executives and business professionals to give their thoughts on the emerging risks that professionals in the field need to watch. Starting with the natural resource shortage risks and concluding with transition risks in a low-carbon economy, we’ve compiled four insightful responses that actuaries should consider.
Natural Resource Shortage Risks
Natural resources are the basis of all economic activities and essential for sustaining human life on this planet. As the global population grows, so does the demand for natural resources, such as water, food, energy, and raw materials. However, climate change, overexploitation, and pollution are putting increasing pressure on these resources. This has led to a growing concern over the potential shortage of natural resources and its potential impact on our society.
Actuaries should be aware of this emerging risk, as it can have significant consequences for insurance companies and their ability to manage risks related to these resources. For example, a shortage of water could lead to increased claims for property damage due to droughts or floods, while a decline in food production could affect life insurance mortality rates. As such, actuaries should consider the potential impact of natural resource shortages when assessing risk and developing strategies for managing it.
Financial Impacts of Climate Events
In navigating the evolving landscape of environmental changes, actuaries play a pivotal role by examining the financial repercussions of climate-related events. This includes events like extreme weather, rising sea levels, and shifts in temperature. As these occurrences become more frequent or severe, the financial impacts ripple across various sectors. Actuaries must factor in potential increases in insurance claims due to heightened risks, devaluation of assets affected by environmental shifts, and interruptions in business operations.
By understanding the financial implications of these climate-related events, actuaries contribute valuable insights that help industries and businesses prepare for the challenges of a changing climate, ensuring a more resilient and sustainable approach to risk management.
Increased Claims from Natural Disasters
Actuaries need to be mindful of a rising risk linked to environmental shifts, such as the heightened occurrence and intensity of natural disasters.
As climate change continues to affect our planet, we are seeing an increase in extreme weather events, such as hurricanes, wildfires, and floods. These natural disasters not only cause physical damage to properties and infrastructure but also have a significant impact on the insurance industry. Insurers are facing higher losses and increased volatility in their claims experience due to these environmental changes.
Actuaries play a crucial role in managing and mitigating this emerging risk. They use sophisticated models to analyze the potential impact of natural disasters on insurance portfolios, assess the financial implications for insurers, and help develop strategies to manage this risk. Additionally, actuaries can also play a critical role in promoting sustainability and responsible environmental practices within the insurance industry.
By incorporating climate change considerations into risk management strategies, actuaries can help insurers make informed decisions that not only protect their financial interests but also contribute to mitigating the effects of environmental changes.
Transition Risks in a Low-Carbon Economy
Transition risks are something actuaries need to be aware of since moving to an economy with less carbon might require significant changes in policies, technology, and markets to address climate change. Depending on how these changes occur, transition risks can bring varying levels of financial risk to organizations.
In this context, policies regarding climate change are still evolving. They typically aim to either limit actions that exacerbate climate change or promote ways to adapt to it. The riskiness and cost of these policy changes depend on their nature and timing. Similarly, new technologies that enable us to transition to a less carbon-intensive and more energy-efficient economy can significantly impact organizations.
If new technology supplants old systems and alters parts of the economy, there will be winners and losers from this shift. The critical question with technology risk is when these new technologies will be ready and begin to be implemented.
