Climate Risk and its Impact on Insurance[Risque climatique et impact en assurance]

This book presents an introduction for beginners to climate science from an insurance perspective. The focus is on the measurement of climate change and of its impact on policyholders and their insurers. Climate change presents several challenges for society, endangering food supply and water security, affecting human health, and threatening transportation systems (Dundon et al., 2016) as well as property (Warren-Myers et al., 2018; Miljkovic et al., 2018). It also affects the economy (Pryor, 2017). The consequences of this environmental change are expected to be deep and far-reaching, particularly in insurance sectors such as agriculture, property-casualty, health and life. As a result, climate change can threaten the sustainability of insurance programs, in different ways. First, because the increase in total losses may require hikes in premiums and solvency capital. A precise quantitative assessment of this increase is not yet determined, but it is clear that both recent and future costs are a serious threat; according to Munich Re (2024), losses caused by natural disasters in 2023 reached US$ 250 bn, with US$ 95 bn of which being insured. Although no disasters of the magnitude of Hurricane Ian occurred in 2023, a fair share of the losses were associated with several severe storms occurred in the US and Europe. These related events are considered as evidence of the global warming trend, with a potential impact particularly on property and casualty insurance (Gupta and Venkataraman, 2024; Golnaraghi, 2021). In this particular insurance sector, Swiss Re (2021) forecasts increased frequency and severity of events due to climate change that will cost 30%-63% more in insured catastrophe losses by 2040. This cost increase could even reach 90%-120% in specific markets, such as China, the UK, France and Germany. Secondly, climate change puts into question some fundamental principles of insurance, such as risk insurability, pooling, diversification, and risk transfer. The literature discusses the possible outcomes and implications for the insurance industry (Charpentier, 2008; Thistlethwaite and Wood, 2018; Courbage and Golnaraghi, 2022). Other, more optimistic perspectives suggest that far from being the victim of climate change the insurance business could find in it an opportunity, through the development of new technical solutions (Rao and Li, 2023; Savitz and Dan Gavriletea, 2019; Wagner, 2022). For now, climate change already has forced the strategic withdrawal of insurers in certain markets in the USA (California, 2023). The general objective of this book is to present an actuarial perspective on the study of climate change and its impact on the insurance industry. Actuaries are experts at measuring and managing risks. The DIALog Research Chair team regroups several members, both from industry and academia, with ample actuarial expertise. Hence it was natural for the DIALog team to tackle this project and explore the impact of climate change on the insurance industry, more particularly in health and life insurance. This study starts by exploring the need for a standardized method to measure climate change. This is crucial in order to compare different regions and periods in a standardised analysis. In recent years the actuarial community has developed actuarial climate indices to measure climate change in an factual, objective and consistent way. First, Chapter 1 reviews the recent scientific literature on the few actuarial climate indices that have been defined so far and extends the existing methodology to calculate an actuarial index for climate data in France. Then Chapter 2 describes how climate science can be used to link a physical climate risk to insurance costs. In particular it focuses on the impact of heat waves on excess mortality. A deterministic and a stochastic model are proposed to link the Heat Index to excess mortality. The chapter includes a frank discussion of the advantages and difficulties with the approach. Finally Chapter 3 further explores the link between extreme temperatures and excess mortality in France. A more technical exposure is used, in order to propose a new mortality forecasting model that includes explanatory terms capturing the correlation between temperature and mortality, as well as the effect of high temperature anomalies.