Climate change has the potential to impact heavily both society at large and the global economy. It is also increasingly being understood as a business risk.

Issues of energy and environment have, for some time, been of key interest and relevance to the actuarial profession on a number of fronts. In particular, the effect of climate change on insurance and the contribution of electricity markets to greenhouse gas emissions.

Such concern on the part of the actuarial community is hardly surprising, given that they are experts at understanding and assessing the financial impact of future uncertain events. There can be no set of complex problems more amenable to, and more in need of, application of the actuarial skill set than those generated by climate change.

Weather and climate are "core business" for the insurance industry. At its most basic, insurers underwrite weather-related catastrophes by calculating, pricing and spreading the risk and then meeting claims when they arise. A changing, less predictable climate has the potential to reduce the capacity of insurers to calculate, price and spread this weather-related risk. Policyholders, shareholders and the community at large all have a stake.

Similarly, a changing, less predictable climate has the potential to reduce the capacity of governments to make secure, long-term strategic decisions on behalf of their citizens. Just as actuarial skills are essential to managing the risks associated with insurance, so are they essential to providing policy makers with practical solutions to the long term financial, health, demographic and other risks associated with climate change.

To understand the breadth of issues to which climate change gives rise - and to which actuarial research can provide a key strategic analysis and decision-making input - consider some of the following implications and risks for the insurance industry of climate change:

Short term:

• property damage from weather events and increased risk to various business lines such as agriculture, energy, marine, engineering and tourism;

• hidden greenhouse gas liabilities impair market value of securities;

Medium term:

• directors and officers liability risks for inadequately addressing potential threats by climate change-related regulations;

• increased pressure on government and private flood insurance systems and relief;

• increased risks to human health, including pollution, displacement of tropical disease vectors, morbidity and so forth;

• real estate impaired by weather events and increased energy costs;

• credit ratings decrease;

• reputational damage due to inappropriate response to climate change issues;

Longer term:

• demographic changes including population displacement leading to social, political and economic instability.

There are numerous ways in which actuarial research can provide a valuable contribution as part of a multidisciplinary approach to solving the enormously complex problems associated with climate change. For example:

• economic valuations of long term investment projects;

• assessment of weather risks through physical damage or crop failure;

• estimation of the impact of carbon taxes;

• management of compensation funds; and

• design and validation of emissions pricing schemes.

Other potential areas for actuarial research include studying:

• how a warming climate may affect the availability and affordability of insurance for consumers and the financial health of insurance companies;

• what actions would be necessary to enable regulators and insurers to mitigate and otherwise respond to these problems; and

• the development of a Climate Change Impact Index.