Climate Change and Carbon Trading: New Avenues for Actuaries

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CLIMATE CHANGE AND CARBON TRADING: NEW AVENUES FOR ACTUARIES (Submitted By: Anupam Sharma, Deepa Gupta, Subhash Goyal, Swati Kwatra)

Executive summary
The increasing risk of Climate change can be measured by the fact that natural catastrophes in 2008 cost the global economy $225 billion, which is one of the costliest year in the history of Insurance business. It will have an impact on Insurance sector in terms of changing pattern of mortality, more frequent property claims etc. Climate change is different than any other risk seen by insurance industry in the sense that it will have huge impact as the time progresses in the form of increased frequency and intensity of natural disasters, thereby causing heavier insurance losses in companies’ balance sheets.

In this paper we have focused mainly on challenges faced by the insurance industry due to climate change and new avenues for actuaries in emerging carbon markets as a solution to the climate problem. Actuaries are known to analyze past events, build complex models, assess the current possible scenarios and predict what lies ahead. We have made an endeavour to explain the working of carbon markets, prospective role of an actuary in such markets and other actuarial solutions to climate change.

We have also highlighted that Actuaries role is not just to consider the change in risk factors due to climate change in existing insurance products but they can also play a key role in carbon management by assessing the risk associated with various projects and can help companies in minimizing carbon liabilities. Actuaries and climatologists can work together to construct weather related catastrophe models and can employ them to stimulate future scenarios. Actuaries with their skill set can help in evaluation and pricing of carbon transactions. Actuaries have responsibility in advancing companies on the development of corporate climate change strategy and new insurance products that incentivize green investments.

The list of disasters: tornadoes in Oklahoma, hailstorms in Sydney, Hurricane Floyd in America, Tsunami in Asia, are just some of the examples which shows the fundamental changes happening in the world’s climate. Climate change is blamed for a significant increase in the amount of damages and insurance losses throughout the world. Hurricane Katrina was the costliest north Atlantic tropical cyclone ever, which hit the gulf coast region of United States on August 28th, 2005. Overall economic impact of hurricane Katrina was estimated to be about 150 billion dollars. If global warming can be as disastrous as some people expect, then insurance companies will be the units to feel the brunt of damages caused by such natural calamities. Climate change is among the biggest challenges faced by us and the generations to come. Its impact will be huge as compared to what we have seen till now. The average number of major weather-related catastrophes such as windstorms, floods and drought is now three times as high as at the beginning of the 1980s. The question is not about whether Global Warming is happening or not, the question is how fast it is happening and the magnitude of impact it might have in the years to come. Insurance sector is and would be facing the heat of changing pattern of climate and should not be content with the outlook that it can adapt itself effortlessly to it. It is probable that climate change will produce throughout the world extreme values of insurance relevant parameters, which can reflect natural disasters of unmatched severity. In this paper, we will focus on two areas in which actuaries could usefully become involved: • Challenges faced by the insurance sector due to the effects of global warming, e.g. changing demographics, change in projections, change in capital requirements for long term viability or sustainability, etc. • Role of Actuaries in emerging carbon markets.

Actuaries not only possess the analytical skills...
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