Later today (November 14th at 6:30pm EST), the 2023 report of the Lancet Countdown on health and climate change will be released, and a US Launch event will be held on November 15th (tomorrow) at noon, EST.
The impact of climate change on the significant increase of the frequency and severity of natural catastrophic events so far is well documented. The changing climate is also affecting the spread of infectious diseases, per 2022 report of Lancet Countdown health and climate change. Climate change will introduce increasing uncertainty to the actuarial assumptions in mortality and morbidity, which are important input for cash flow projection and pricing of long cash flow insurance policies, such as life insurance and long-term care. This, combined with other changes in accounting standards such as LDTI, IFRS 9/17 and regulatory capital requirements such as Solvency II, could force redesigning of life insurance products and re-alignment of strategic asset allocation decisions.
Climate risk measurement and management has been on the forefront of insurance regulation initiatives. In 2022, NAIC adopted a new insurance company climate risk disclosure standard, in alignment with the international task force on climate-related financial disclosure (TCFD.) All insurance companies are required to respond to the 2023 NAIC climate risk disclosure survey by August; At the beginning of this month (November 1, 2023,) the Federal Insurance Office (FIO) provided public notice on its intent to proceed with an October 2022 proposal for collecting zip code level insurance data from large homeowners insurance providers.
Climate risk is clearly an important item on ORSA (own risk solvency assessment) for property and health insurers. For insurers with long term liability cash flows, I would say that the impact is as significant and with heightened uncertainty, because any change in mortality/morbidity assumptions would have a much bigger and long-lasting impact on the pricing of the liability, and the asset volatility is much larger due to the longer asset duration than that of health and P&C insurers.
Given these uncertainties, I believe that life and LTC insurers should stress test their product design and investment strategy jointly under various climate scenarios and mortality/morbidity assumptions. And any latest information from the Lancet countdown annual reports might be useful in guiding the construction of stress testing scenarios.
#ClimateRisk, #ORSA, #LTC, #Insurance, #LancetCountdown, #NAIC, #TCFD, #LDTI
