5 percent contribution could be enough to tip the scales.
■■ We don’t know whether the climate models have any validity. Models aren’t reality, and there is model uncertainty. Climate
models do provide an opportunity to study climate by conducting experiments that wouldn’t be possible otherwise. The model
assumptions, calibration, and validation are important in determining model credibility. When started with past conditions, the
climate models used in the 2007 IPCC report were able to reproduce present-day climate successfully, including the temperature
structure of the atmosphere and the geographical distribution of
precipitation. The models show consistency in that all point to
increasing average global temperatures as CO2 levels in the atmosphere increase.
■■ An increase of a few degrees in temperature can’t make that
much difference. This increase is a global average. The increase
will be more significant in the polar regions and over almost all land
areas. Also, the relationships governing earth’s climate processes
are often nonlinear, involving feedback loops and tipping points.
The difference between an ice age and an interglacial warming
period, like the one we are experiencing now, is on average only
about 5 to 6 degrees Celsius. Also, think about the difference that
only a few degrees can make for the human body temperature.
■■ Nothing is going to happen right away, so why worry
about it now. While most scientists aren’t predicting immediate catastrophic surprise events, like the West Antarctic ice
sheet slipping into the ocean and raising sea levels three meters,
the fact is that no one knows for sure. The overall operation of
the earth’s climate system is reasonably well understood, but
the exact impact of feedback loops and the location of tipping
points are less clear. Even with perfect scientific knowledge,
there’s still uncertainty because what happens will depend in
part on actions taken or not taken by governments, corporations, and individuals now and in the future.
■■ Doing something about climate change is too expensive.
Doing nothing may carry a significant opportunity cost, making inaction even more expensive. The Economics of Climate
Change: The Stern Review, published in 2006 under the direction of Lord Nicholas Stern, then head of the U.K.’s Government Economic Service and former World Bank chief economist, is one source that presents this case and concludes that
the benefits of early action can outweigh the economic costs
of doing nothing. Investments in climate-change mitigation
and adaptation aren’t unlike buying insurance. Barring arson,
you wouldn’t wait to purchase fire insurance until you were
certain of your home’s destruction by fire. You purchase insurance for financial security.
■■ Let’s wait and see what does happen before we do any-thing. Uncertainty surrounds climate-change issues and their
implications, but some actions are a good idea regardless of the
magnitude of climate and environmental change. These are
the no-regrets actions that are beneficial both in addressing
climate change and in promoting the general good for society,
e.g., reduction in air and water pollutants, alternative energy
sources, better agricultural techniques, etc. For risk professionals, we can do even more.
The case for contingent Risk management
This is a difficult situation, and we find ourselves at the mercy
of our own understanding. We should be skeptical but also
open to conclusions that cannot be definitively proved through
analysis of empirical data. We need to recognize the likelihood
that some climate changes are probable rather than improbable.
For instance, it’s probable that we will see a warmer earth with
effects more pronounced at higher latitudes. It’s likely that we
will see more erratic and less predictable weather patterns, and
it’s possible that we will see more extreme events.
Some groups may use this lack of certainty to support the case
for inaction, but many climatologists believe that inaction carries
its own risks. Actuaries have the opportunity to play a leadership
role in responding to climate change. We can do this by addressing climate-change uncertainty in the context of contingent risk
management. We can adapt our traditional tools and techniques
to the requirements of a new application to assess the exposure of
the insurance industry to climate-change-related liabilities. For instance, actuaries could use climate-change scenarios to assess the
risks, opportunities, and financial consequences of global temperature changes and other environmental effects of climate change.
The newly created CAS Climate Change Committee, through its
research and development efforts, can play a facilitating role as the
profession moves to meet this challenge.
SUSAN WOERNER is president and actuary of Woerner
Consulting and former corporate actuary and vice president of
risk management for Nationwide Insurance. She is chairperson
of the Casualty Actuarial Society’s Climate Change Committee.
Carbon Dioxide Information Analysis Center, http://cdiac.ornl.gov.
Hadley Center of the British Meteorology Office, www.metoffice.gov.uk.
Henson, Robert, The Rough Guide to Climate Change, New York:
Rough Guides Ltd., 2008.
Houghton, John, Global Warming: The Complete Briefing,
fourth edition, Cambridge: Cambridge University Press, 2009.
IPCC, 2007: Climate Change 2007: The Physical Science Basis.
Contribution of Working Group I to the Fourth Assessment
Report of the Intergovernmental Panel on Climate Change,
[Solomon, S., D. Qin, M. Manning, Z. Chen, M. Marquis, K.B. Averyt,
M. Tignor, H.L. Miller (eds.)]. Cambridge University Press,
Cambridge, U.K., and New York, 996 pp.
McElroy, Michael, The Atmospheric Environment: Effects of
Human Activity, New Jersey: Princeton University Press, 2002.
Peara, Andy, and Mills, Evan, “Climate for Change: An Actuarial
Perspective on Global Warming and Its Potential Impact on Insurers,”
Contingencies, January/February 1999.
Stern, Nicholas, The Economics of Climate Change: The Stern Review,
Cambridge: Cambridge University Press, 2006.
Surface Temperature Reconstructions for the Last 2000 Years,
Wolfson, Richard, Energy, Environment, and Climate, New York:
W. W. Norton, 2007.
This article is solely the opinion of its author. It does not express the official
policy of the American Academy of Actuaries; nor does it necessarily reflect
the opinions of the Academy’s individual officers, members, or staff.