Climate Change – Information Note for Appointed Actuaries (2023)
Climate change is a material strategic risk and one of the major challenges facing financial institutions today. Regulators recognise that the financial risks associated with climate change could undermine financial stability and are quickly increasing their expectations around the measurement and management of climate change risks and opportunities. Investors are demanding disclosures on climate risks and opportunities, with the Task Force on Climate-Related Financial Disclosures (“TCFD”) now seen as the global standard, the recent release of the International Sustainability Standards Board IFRS S1 and S2 standards, and the Australian Treasury in the process of consulting on mandatory climate disclosures for certain entities.
This Technical Paper provides Appointed Actuaries with an outline of how insurance operations may be impacted by climate change and offers suggestions to address these issues in a Financial Condition Report. Australian Prudential Regulation Authority’s (“APRA”) Prudential Standard CPS320 outlines the requirements for the Appointed Actuary (“AA”) in writing a Financial Condition Report. In this note we refer to individual sections of this prudential standard where appropriate
This information may also be helpful in many other situations when advice is provided to financial institutions. It is noted that climate change is just one aspect within wider sustainability considerations. Sustainability is commonly defined as “meeting the needs of the present without compromising the ability of future generations to meet their own needs”, where human needs include a sound environment, a just society and a healthy economy. Given the regulatory focus on climate change and considering that actuarial involvement in climate change is more developed, this Technical Paper addresses climate-related risks and opportunities only.
This Technical Paper does not constitute legal or financial advice.
Any interpretation or commentary within the Technical Paper regarding specific legislative or regulatory requirements does not guarantee compliance under applicable legislation or regulations. Accordingly, Members are encouraged to seek clarification from the relevant regulator and/or seek legal advice in the event they are unsure or require specific guidance regarding their legal or regulatory obligations.
Climate change is a rapidly evolving area; members are encouraged to refer to the latest legislative and regulatory requirements and to consider the wide range of information sources available beyond those mentioned in this paper. The information presented in this paper is generic and does not allow for the unique nature of each organisation. This paper is for education and information only and a member should rely on their own research and analysis in forming their views and giving advice.
Members should also refer specifically to the following APRA regulations:
- Prudential Standard CPS320 Actuarial and Related Matters.
- Prudential Standard CPS220 Risk Management.
- Prudential Standard CPS510 Governance.
- Prudential Practice Guide CPG229 Climate Change Financial Risks.
This Technical Paper does not override the requirements in these documents or in any other Professional Standards, Practice Guidelines or other Regulatory Standards that are relevant to this area of work.
This Technical Paper was prepared by a subgroup of the Climate and Sustainability Working Group. Ongoing feedback from Members is encouraged; any feedback should be directed to the Climate and Sustainability Working Group via firstname.lastname@example.org.
Read the Technical Paper.
Home Insurance Affordability Update and Funding for Flood Costs
One year on from the Actuaries Institute report, Home Insurance Affordability and Socioeconomic Equity in a Changing Climate, home insurance affordability remains a significant concern.
To highlight and address this issue, the Institute has published new research, the Home Insurance Affordability Update and Funding for Flood Costs: Affordability, Availability and Public Policy Options.
Home insurance premiums rose 28% to $1,894 in the year to March 31, with the highest risk properties, such as those in flood-prone areas, up by 50%.
The proportion of “affordability stressed” households rose from 10 to 12%, spending on average 8.8 weeks of their income on home insurance. 1.24 million Australian households are facing home insurance affordability stress.
Flood risk, in particular riverine flood, plays a significant role in the current pressure on home insurance affordability. For 171,000 households across Australia, riverine flood risk contributes more than half of their home insurance premiums. If they were fully insured, the total flood premium for these households would be $1.5 billion per annum, or $8,800 on average per household. This is the size of the current problem.
- Although many initiatives are underway, more could be done. The Institute supports a package of short, medium and long-term policy measures that should be considered by all stakeholders to reduce affordability stress, including risk reduction initiatives, reform of insurance-based taxes or targeted subsidies and, if policymakers decide relief needs to be accelerated, the introduction of interim cost-sharing measures like an insurance or reinsurance pool.
Home insurance affordability and socioeconomic equity in a changing climate
By Sharanjit Paddam, Calise Liu and Saroop Philip
This Green Paper introduces the Australian Actuaries Home Insurance Affordability (AAHIA) Index.
Affordable insurance is a key part of ensuring resilient communities.
The paper highlights that one million Australian homes (approximately 10%) spend more than four weeks of their gross annual income on home insurance, classified as vulnerable on the AAHIA Index. These vulnerable households are concentrated in the Northern Territory, Queensland and Northern NSW.
Affordability pressure is projected to intensify with climate change, and the impact will be greater for these already vulnerable households. The paper presents results under both a low and high emissions scenario.
Policy solutions to address home insurance affordability and the socioeconomic inequities of climate change are wide ranging and include multiple stakeholders.
Green Papers are commissioned and overseen by the Actuaries Institute and explore a problem, potential solutions and considerations. Green Papers are provisional for discussion purposes only and do not constitute consulting advice on which to base decisions.
The Impact of Climate Change on Mortality and Retirement Incomes in Australia
By Ramona Meyricke and Rafal Chomik
In Australia, the main risk to human life from climate change arises from heatwaves. As the frequency and duration of heatwaves increase, so will the number of heat-related deaths - and older people are the most vulnerable.
Other wide-ranging implications of climate change could include lower investment returns and superannuation contributions, with consequent lower retirement incomes.
This paper outlines these heat-related risks and explains why they should be considered by life insurers and annuity providers, individuals and government.
- Heatwaves, which have killed more Australians than any other natural disaster, are expected to become more frequent and last longer.
- Deaths from heatwaves could rise by 12% among over 65-year-olds by 2060-2080 in some regions.
- Climate change may have negative long-term return implications for investors.
- For individuals, it may mean lower super balances; illustrative modelling suggests reductions of 11-18% for the median earner.
The Dialogue is a series of papers written by actuaries and published by the Actuaries Institute. The papers aim to stimulate discussion on important emerging issues. The opinions expressed in this paper are those of the author and do not necessarily represent those of either the Institute of Actuaries of Australia (the ‘Institute’), its members, directors, officers, employees, agents, or that of the employers of the author
Climate Risk Disclosure - Financial Institutions Feel the Heat
By Sharanjit Paddam and Stephanie Wong
Climate change raises real risks and opportunities for financial institutions which need to be identified, managed and disclosed. In this issue, two senior actuaries recommend an eight-point strategy to address climate change.
- Australian institutions are ill-prepared for the impact of rising temperatures and extreme weather events and the effect these will have on their balance sheets.
- Banks and general insurers have acute and long-term exposures and many Australian financial institutions have yet to understand the scope of the risk and their opportunity.
- The impact across industries of rising temperatures and an increase in floods, bush fires and cyclones, are likely to result in acute physical risk to property.
- There is a legal risk for financial institutions if there is a finding in favour of shareholder action over inadequate disclosure of climate change risks.
- The transition to low carbon energy presents both risks and opportunities for financial institutions, investors and workers.
is a series of papers written by actuaries and published by the Actuaries Institute. The papers aim to stimulate discussion on important emerging issues. The opinions expressed in this paper are those of the author and do not necessarily represent those of either the Institute of Actuaries of Australia (the ‘Institute’), its members, directors, officers, employees, agents, or that of the employers of the author
Property Insurance Affordability - Challenges and Potential Solutions
This paper was prepared by the General Insurance Affordability Working Group
on behalf of the Institute.
Households in up to 12% of Australian postcodes may face pressure meeting annual home insurance premiums, a figure which represents around 7% of Australia’s population, according to the Research Paper.
This affordability pressure can give rise to households having a ‘protection gap’, where inadequate or no insurance is held.
That gap is concerning for individuals, communities, governments (taxpayers) and charitable organisations because they are all called upon to bridge the gap in times of loss.
Policymakers are looking for better ways ahead, as evidenced by the Australian Competition and Consumer Commission inquiry and the Royal Commission into natural disasters. State of the Climate 2020, a CSIRO and Bureau of Meteorology report released earlier this month, adds a further contextual imperative.
The Paper aims to help policymakers better understand affordability issues and considerations with potential solutions
1 December 2023: Submission to Treasury Consultation - Sustainable Finance Strategy
The Institute supports the key objectives of the Sustainable Finance Strategy, which will be a critical foundation to supporting the Government’s emissions reduction target and an orderly and positive economic transition. The submission responds to various issues including disclosures, awareness and education, provision of simplified and free resources, greater collaboration across parts of government and regulators to further improve modelling and understanding of the transition, and concern that the YFYS performance test constrains activities relating to ESG, sustainability and carbon transition.
17 December 2021: Response to Treasury – Exposure Draft Legislation –Cyclones and Related Flood Damage Reinsurance Pool
This response to the ‘Exposure Draft Legislation – cyclones and related flood damage reinsurance pool’ draws on the Institute’s 18 June 2021 submission to the initial consultation. However, additional comments are provided in this submission, including: 1) technical clarification of the Event Definition – the Institute suggests the definition should look to past events to understand how the pool definitions will apply in practice and resolve issues related to claims which may fall outside the draft pool definitions; 2) Transparency and disclosure of data and the pricing framework – the Institute generally supports Treasury’s pricing schedule for the cyclone and related flood damage reinsurance pool to improve transparency and confidence; and 3) other risk control measures – we refer to the Institute’s Property Insurance Affordability Paper from November 2020 for additional policy measures to address risk reduction.
26 November 2021: Actuaries Institute Letter to Geoscience Australia on Improving the Resilience of Households and Communities to Natural Perils
The Actuaries Institute understands Geoscience Australia is seeking to establish the factors that affect vulnerability of communities to severe wind events. One of the lenses into understanding that vulnerability is insurance uptake and affordability among the communities. At the request of Geoscience Australia, the Institute has analysed the following six local government areas (LGAs): Noosa Shire, Sunshine Coast, Moreton Bay, Redland City, Brisbane City and the City of Gold Coast.
16 September 2020: Actuaries Institute Submission to Counsel Assisting the Royal Commission into National Natural Disaster Arrangements
The Actuaries Institute commends Counsel Assisting for its considered and extensive Interim Observations and Draft Propositions on this issue of growing national importance. The Institute supports many of the draft propositions and has separately submitted a completed Draft Propositions Response Table in the requested electronic format.
21 May 2020: Notice to Give Information (Witness Statement) to Royal Commission into National Natural Disaster Arrangements
Witness Statement by Sharanjit Paddam, Convenor of the Actuaries Institute Climate Change Working Group, to the Royal Commission.
16 April 2020: Actuaries Institute Submission to Royal Commission into National Natural Disaster Arrangements
The Institute notes that immediate emergency response is critical in the preservation of life and an important part of disaster arrangements, but we have confined our comments in this submission to issues regarding mitigation and adaptation, insurance and long-term financial recovery for communities. This submission synthesises the findings from the Institute’s body of work under four main areas: natural disasters in Australia, the changing climate, affordability of insurance and health impacts.
10 October 2019: Northern Australia Insurance Inquiry - Second Update Report
The Actuaries Institute ("the Institute") welcomes the opportunity to comment on this report.