IAA.Climate

Question 1

What are the 3 main risks climate related for P&C insurers ?

Answer 1

1. Physical risk - direct damage arising from climate phenomenon (e.g., hurricanes, floods , rising sea levels, shifting rainfall patterns)
2. Transition Risk - arising from the adjustment toward a low-GHG economy - driven by: policy, legal, technological, and market changes
3. Liability Risk - claims or litigation from failure to mitigate, adapt, or disclose climate-related risks (e.g., D&O, Professional Indemnity)
4. Reputational risk: damage from being seen as insufficiently responsive to climate risks (e.g., when premiums are raised or coverage is denied)

2 main risks : Physical & Transition

Question 2

Distinguish between acute and chronic physical risks. Give examples of each.

Answer 2

Acute physical risks:
- Increased frequency/severity of extreme weather events (floods, hurricanes, wildfires, hailstorms)
- sudden, event-driven
- e.g., hurricanes, floods, hailstorms, bushfires, cyclones.

Chronic physical risks:
- long-term climate shifts
- e.g., rising sea levels, changing rainfall patterns, coastal inundation and erosion, shifting agricultural conditions.

Both affect insurer liabilities (claims) and assets (investment values and credit risk).

Question 3

What are examples of transition risks actuaries must consider for general insurers? (2)

Answer 3

- New technologies (EVs, autonomous vehicles) changing insurance pricing and product design
- Shifts in types of industries requiring changes in products or coverages underwritten
- Growth and contraction of economic sectors affecting premium revenue
- Liability risks under D&O and Professional Indemnity from failure to address climate risks via mitigation, adaptation, or disclosures
- Regulatory and legal changes that can emerge rapidly over short timeframes

Question 4

what are the 2 scenarios analysis by TFCD for climate risks?

Answer 4

1. Exploratory scenarios:
   - explore a range of alternative plausible futures
   - used for resilience testing and stress testing (tail-risk scenarios)
   - There is no single target outcome
   - goal is to understand how a strategy holds up across diverse futures.
2. Normative scenarios:
   - Set the desired future outcome first, then identify the pathways to reach it
   - used for target-setting and implementation plans.
   - Reverse stress testing (identifying what makes a business model unviable) is a variant of normative scenarios.