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

An actuary at a Pune consultancy is asked by a client, a large manufacturer, to estimate the financial impact of climate-related physical and transition risks on its pension and insurance exposures over 30 years. Climate science and policy are highly uncertain. Which approach best reflects sound actuarial practice?

The best approach is scenario analysis across several plausible climate pathways, with assumptions and limitations stated clearly. Because history is a poor guide and uncertainty is high, a single confident estimate would mislead the client, whereas transparent scenarios support informed decisions.

  1. AUse scenario analysis with several plausible pathways, state assumptions and limitations clearly, and avoid presenting a single point estimate as certainCorrect
  2. BDecline the work because actuaries may only value life insurance liabilities
  3. CUse only the past 10 years of claims data and assume the future is identical
  4. DPresent the single most favourable scenario to avoid alarming the client
  5. Ignore transition risk because it is not measurable

Explanation

With deep uncertainty and little relevant history, scenario analysis with transparent assumptions and limitations is appropriate. Using only past data ignores structural change, and choosing a favourable scenario would breach the duty to communicate clearly and not mislead.

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