Climate Risk and Long-Term Actuarial Projections
How climate change affects actuarial models and what MAS-II candidates should know about long-term projections.
Climate Risk in Actuarial Work
Climate change introduces non-stationarity into historical loss data, which violates assumptions underlying many traditional models. Warmer temperatures increase the frequency and severity of hurricanes, wildfires, and flooding. Actuaries must adjust catastrophe models, trend assumptions, and reserve projections to account for shifting risk profiles over multi-decade horizons.
Approaches for MAS-II
Representative Concentration Pathway (RCP) scenarios from climate science provide frameworks for projecting future conditions. Actuaries translate these into loss distributions using adjusted catastrophe models. Trend analysis with changepoint detection helps identify when historical patterns shift. For the exam, understand how to incorporate climate scenarios into pricing and reserving, recognize the difference between physical and transition risks, and explain why simple extrapolation of historical trends may understate future losses in climate-sensitive lines.