New risk on the block – why climate risk is not going away and why actuaries should care

By Pamela Hellig: Consulting Actuary at Insight Life Solutions

Whatever happened to CFCs?

If hashtags had existed in the 90s, #OzoneLayer would have been trending. Hard.

By 1984, the ozone layer over Antarctica had lost one-third of its thickness compared to previous decades. Scientists discovered that the culprit was a human-made compound called chlorofluorocarbons (CFCs), used in aerosols and cooling devices. This thinning of the ozone layer over Antarctica became known as the ozone hole.

As news of the discovery spread in the decade that followed, alarm bells rang worldwide. The serious threat posed by ozone depletion – rises in skin cancer and cataracts, harm to plant growth, crops and animals and reproductive problems in fish, crabs, frogs and phytoplankton, the basis of the marine food chain – spurred international action and collaboration.

But considering how grave a threat the ozone hole was deemed to be, why do we not hear about it anymore?

Because it’s not the problem it once was. During the 1990s and early-2000s, the production and consumption of CFCs were brought to a halt. By 2009, 98% of the associated chemicals had been phased out. And based on scientific assessments, the ozone layer is expected to return to pre-1980 levels around the middle of the century.

This impressive turn-around is largely due to the unprecedented international steps that governments took to tackle the problem. Projections that the destruction of the ozone layer would adversely impact the health of humans and ecosystems sparked public fear, mobilised scientific investigation and galvanised the world’s governments to collaborate in a way that hadn’t been seen before.

So, if we managed to pull together once, can climate change, which seems to pose similar threats to humans and ecosystems, be tackled similarly? In 20 years, will #ClimateChange just be a blip in our collective memory? The answer is no. Addressing climate change will not be as easy as switching from aerosol deodorant to roll-on, and it will affect everyone – even actuaries.

The challenges of a just transition

Eliminating CFCs was a relatively straightforward thing to do. We just don’t have that same kind of substitution regarding climate change. Turning away from fossil fuels has economic, political, ethical and technological challenges. This problem requires not just people caring but government action, changing technologies, and a total energy system overhaul.

Climate scientists agree that we need to keep the warming of the planet as far below two degrees as possible if we are to ensure a future for humanity. It is widely believed that a net-zero greenhouse gas emissions world can still be achieved by 2050, but we have choices about how we transition to this state. A just transition ensures environmental sustainability, decent work for all, social inclusion and poverty eradication. The Presidential Climate Commission’s A Framework for a Just Transition in South Africa, published in July 2022, extends the definition to specifically consider those most impacted (the poor, women, people with disabilities and the youth) and purports that “[a] just transition builds the resilience of the economy and people through affordable, decentralised, diversely owned renewable energy systems; conservation of natural resources; equitable access of water resources; an environment that is not harmful to one’s health and well-being; and sustainable, equitable, inclusive land use for all, especially for the most vulnerable.”[1]

Quite a tall order, not only because 77% of South Africa’s primary energy needs are provided by coal[2], but also due to the countless conflicting interests that must be balanced to achieve a just transition.

[1] https://pccommissionflow.imgix.net/uploads/images/A-Just-Transition-Framework-for-South-Africa-2022.pdf
[2] http://www.energy.gov.za/files/coal_frame.html#:~:text=South%20Africa%27s%20indigenous%20energy%20resource,needs%20are%20provided%20by%20coal.

Plurality of values and conflicts

In ethics, the plurality of values is the idea that several values may be equally correct and fundamental yet conflict with each other. In many cases, there can be no objective ordering of them in terms of importance. This concept may help explain why there is no easy solution to climate change.

Consider the example of the transition to renewable energy in South Africa. Reducing dependence on fossil fuels is essential in achieving sustainability goals. But this does not consider the 100,000 people employed in the coal mining sector[1] who depend on this industry to survive. Such conflicts should be resolved with regard to the unbalanced nature of the different groups of stakeholders.

Some other examples of conflicts that arise between sustainability and justice goals are:

• Corporate interests: how can businesses reconcile the objectives of maximising profits while minimising environmental impacts?
• Government interests: given a finite budget, how should governments balance spending on sustainable development with other responsibilities (health, education, transport, social benefits, etc.)?
• Intragenerational inequality: refers to the conflict between members of the same generation. For example, countries experiencing extreme climate events are often not the same as those who benefited from the industrialisation which caused climate change. How should the responsibility of addressing climate change be shared among them?
• Intergenerational inequality: refers to the conflict between present and future generations. For example, how can today’s generations be convinced to bear the economic costs of transition so that future generations may enjoy the benefits?

[1] https://www.statista.com/statistics/241420/south-african-mining-key-facts/

What are the implications for insurers?

Even if we could all agree that climate change is real, caused by human behaviour and already happening, one might, as a member of the insurance industry, still ask the question: “so what?” This is especially true for life insurers, where the direct or immediate impacts of climate change events (such as floods, droughts, and weather fluctuations) may not yet be felt to the same extent as general insurers.

Unfortunately, ample evidence suggests that climate change is not the problem of future generations (of the population in general and actuaries in particular) – it is already happening. It will soon start having noticeable effects on key aspects of life insurers’ business: mortality, morbidity, new business volumes, reinsurance and, of course, the economy. If this fails to nudge insurers into action, perhaps regulation will. In Prudential Communication 10 of 2022, the Prudential Authority (PA) set out what is expected from supervised institutions regarding climate risk and what supervised institutions can expect from the PA, namely “specific regulatory guidance in 2023 on its expectations on how climate risks should be integrated into supervised institutions’ risk management, governance and reporting processes.”

Regardless of one’s own views on climate risk, insurers will soon be obligated, by regulation, to incorporate it into their risk management frameworks. The insurers that transform early and actively engage with their client base, industry and regulators in solving the problem give themselves the best chance of building resilience and ultimately benefiting from a more stable profit stream in the long term.

Given its uncertainty, scale and complexity, formulating a strategy to address climate risk may be daunting. Pamela Hellig prepared a recorded presentation on climate risk for actuaries at the ASSA Convention, held from 25 to 28 October 2022, which may be watched here. Read the follow-up to this piece, outlining how actuaries can get started on their climate risk journey, published in the 2022 Edition 3 of SA Actuary Magazine, here.