October 2017

Research Corner

By Jeffrey Beckley, Scott Lennox and Erika Schulty 

Did you know that the Society of Actuaries (SOA) is a sponsor of research on climate and environmental sustainability? In 2015, the SOA established the Climate and Environmental Sustainability Research Committee (CESRC). The purpose of the CESRC is to expand the boundaries of the actuarial profession in this emerging area of practice and provide actuaries, policymakers, and others with information that is of utility and interest for managing and mitigating risk associated with climate, weather, and environmental changes.

The ­­­­CESRC initiates, vets and pursues ideas for research on actuarial topics related to climate and environmental topics funded by a budget it oversees or from other sources. CESRC also establishes the necessary framework to produce quality research subject to guidelines established by the REC that benefits actuaries and others. Each year, the SOA provides research funding for the CESRC. Additional funding can be requested from the Research Executive Committee (REC) for projects that exceed the funding available otherwise.

It is hoped that this research will “demonstrate to the SOA’s membership and its other stakeholders, as well as to the scientific community and the public at large, the role actuaries can play in analyzing the financial risks, and the costs and benefits of mitigation strategies, associated with global climate change and environmental (un)sustainability. It is further hoped that this research will lead to new and rewarding career paths for increasing numbers of actuaries.” [1]

There are a number of research projects that have been initiated by the CESRC. A few of those projects have been completed. Research projects that have been completed are:

  • Climate Sources for Actuaries completed by Mark Alberts, FSA, MAAA, of Alberts Actuarial, Inc

    As stated in the paper, “The purpose of this project was to initiate the development of a repository of information regarding existing climate and environmental sustainability research of interest to actuaries. The repository, which we refer to as the Climate Sources for Actuaries Resource Index (or Resource Index), will be of use to the SOA and the CESRC in developing their future environmental research programs; to actuaries practicing in the area of climate change and environmental sustainability; to actuaries and their employers, who need to understand the implications of climate change to their existing areas of practice; and to climate researchers interested in improved financial projections associated with climate change.”
    The research consists of a report and a Resource Index in Excel. The CESRC expects to update the Resource Index periodically so that it remains current and a valuable source for actuarial researchers in the area of climate and environmental sustainability.
  • Climate, Weather and Environmental Resources for Actuaries completed by Robert Erhardt, Ph.D., ACAS, Assistant Professor of Statistics at Wake Forest University.
  • The research paper deals with the questions “How do scientists know?” and “What could actuaries do?” This report is a collection of sources that deal with these two questions.

    The reports states, “Most actuaries and risk managers do not fully understand climate science, just as most climate scientists do not fully understand insurance markets; however, actuaries and risk managers interested in climate risk must strive to achieve ‘climate literacy’ to make the most informed business decisions. That is, they should become conversant in the major findings of climate science. They should understand the evidence for climate change and the pace and scale of projected changes. They should also understand the range of possible outcomes and have an intuitive grasp of both best-case and worst-case scenarios.”

    The report details many articles, research reports, and books which are valuable in assisting the actuary and risk manager to become climate literate. Many of these sources have been written in terms that can be understood by the nonscientific reader.

    With regard to what actuaries could do, the report states that “responses to climate change fall into three broad categories: mitigation, adaptation and geoengineering. Mitigation is about slowing or halting the change itself. Adaptation concerns actions that may help society build climate resilience to deal with climate changes…Finally, geoengineering addresses efforts to intervene actively in the climate system. Risk management, insurance and associated regulations mostly fall into the category of adaptation, and it is here that actuaries may find they have the greatest potential impact.”

    The report goes on to discuss and honestly assess case studies of implemented responses to climate change.

In addition to these two completed research projects, the CESRC has a number of research projects which are currently in progress. These projects include:

Discount Rates in Climate Change Studies

This project is to conduct research addressing the use of discount rates and related factors in studies of climate change or environmental sustainability.

Topics in Environmental Sustainability (University of Wisconsin-Milwaukee, Brazauskas)

This project aims to build an extremely statistically accurate emulator of atmospheric surface temperature. This emulator will be further applied for meteorological risk assessment over the domain of continental North America to achieve an order-of-magnitude or larger gain of numerical efficiency compared with the schemes based on high-resolution dynamical atmospheric models. It is anticipated that the resulting methodology will lead to unprecedented accuracy of the risk estimates that are of interest to actuaries.

21st Century Climate Projections

This project’s first phase will produce a white paper and several presentations to cover in a broadly accessible way how climate models are constructed, and to what degree scientists have confidence in these projections. This will also focus on opportunities for actuaries to measure and manage these climate related risks, with particular attention to actuaries working in life, health, finance, and enterprise risk management, in addition to the direct connections for property and casualty actuaries. Phase II will produce a paper whose working title is “Index Based Crop Insurance and Regional Climate Change in North America,” to be submitted to an actuarial journal, along with the free distribution of the corresponding computer script used to analyze the data. The script will show how to download, manipulate, and analyze both regional climate model output and historical weather data for an actuarial application. These two materials will provide a working example of how climate model output can be analyzed by actuaries when studying study climate risks.

International Catastrophe Pooling for Extreme Weather

This project will build on existing research to analyze the main catastrophe pooling structures currently in place in and outside the U.S., summarize their strengths and weaknesses to their designs and suggest possible diversification, other improvements and expansions to better address small nations’ insurance needs. The primary risk in question is catastrophic property damage triggered by flood and drought.

Managing Climate and Carbon Risk

This project will investigate arbitraging risks related to climate change and environmental sustainability within insurance company and/or pension plan investing. Limiting the research to insurance and pension investing is intended to ensure the research is relevant to practicing actuaries.

Additionally, the CESRC is in the process of contracting with researchers for two additional research projects.

Finally, the CESRC will be issuing Requests for Proposals in the next couple of months for an additional research project as well as an essay contest with cash prizes. Once the request for proposals are available, they can be found here.

As you can see, the CESRC has had a busy two years since its inception. If you have any questions about the CESRC, please feel free to contact the authors. If you have an interest in serving on the CESRC, please fill out the volunteer form here.

Jeffrey Beckley, FSA, MAAA, is the director of the Actuarial Science Program at Purdue University and is the chair of the CESRC. He can be reached at jeffbeckley@indy.rr.com .

Scott Lennox, FSA, FCAS, FCIA, staff fellow, and Erika Schulty, research associate, work for the SOA and support the CESRC. They can be reached at slennox@soa.org and eschulty@soa.org respectively.

[1]Taken from the research report on Climate Sources for Actuaries written by Mark Alberts.