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IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area

A firm of consultants in Pune wants to offer actuarial advice on climate-change risk to banks and insurers. Climate scenarios involve very long time horizons and deep uncertainty with little historical data. Which challenge best describes the difficulty for actuaries applying traditional methods here?

Past data is a poor guide because climate risk is changing and long term, so actuaries must rely on scenario analysis and be open about uncertainty. Traditional experience-based extrapolation is unreliable here, which makes this an emerging challenge for the profession.

  1. APast experience data cannot be relied on to predict future losses, so scenario analysis and clearly stated uncertainty are neededCorrect
  2. BClimate risk affects only the marketing department, not financial models
  3. CTraditional methods work perfectly because climate is stable
  4. DLong time horizons make discounting unnecessary
  5. Actuaries are legally forbidden from commenting on any climate matter

Explanation

Climate risk is non-stationary and lacks relevant history, so extrapolating past data is weak. Actuaries use scenarios, stress tests and explicit statements of uncertainty. The other options are false or irrelevant.

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