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Session agenda Time Today’s Speakers

1 Introduction 1 min

2 Climate change and life insurance 24 min

3 Modelling hypotheses case study 10 min

4 Risk mitigation case study 5 min

5 COVID-19 and climate change 5 min

Questions 15 min

Thank you for joining the CAFII webinar with Deloitte. The session will start momentarily.

1© 2020 Deloitte owned materials. Confidential. Not for distribution

Carolyn MurnaghanSenior Manager, Deloitte• Specialist in risk modelling and governance• FSI specialist in insurance and reinsurance,

banking and capital markets

Harry LiManager, Deloitte• Expertise in actuarial capital management,

actuarial audit and external peer review• Life insurance specialist and member of the

CIA Climate Change subcommittee

Joe SollyPartner, Deloitte • Eastern Canada leader of Sustainability &

Climate Change• Leads climate disclosure practice

CAFII webinar: The Looming Impact of Climate Change Upon the Life and Health Insurance IndustryJune 9, 2020

© 2020 Deloitte owned materials. Confidential. Not for distribution

Introduction of speakers from Deloitte

Carolyn MurnaghanSenior Manager, Deloitte• Specialist in risk modelling and governance• FSI specialist in insurance and reinsurance, banking and capital [email protected]


Joe SollyPartner, Deloitte • Eastern Canada leader of Sustainability & Climate Change• Leads climate disclosure [email protected]

Harry LiManager, Deloitte• Expertise in actuarial capital management, actuarial audit and external peer review• Life insurance specialist and member of the CIA Climate Change [email protected]

mailto:[email protected]



Climate change, life and health

Joe SollyDeloitte Partner, Sustainability & Climate Change

Carolyn MurnaghanSenior Manager, Risk Advisory, Deloitte

© 2020 Deloitte owned materials. Confidential. Not for distribution 4

An evolution to “green / environmental”


Top 5 Global Risks in Terms of Likelihood

Top 5 Global Risks in Terms of Impact

Extreme weather

Climate action failure

Natural disasters

Biodiversity loss

Human-made environmental disaster


Weapons of mass destruction

Biodiversity loss

Extreme weather

Water crises

In the 2020 Global Risks Report from the World Economic Forum (WEF), all five of the top risks by likelihood, and three by impact are climate-related

2020

The WEF Global Risks Landscape


Extreme weather

Likelihood

Impa

ct


Infectious diseases

The Global Risks Interconnections Map shows climate action failure to be closely intertwined with other major risks, such as food crises and critical infrastructure failure

Climate change poses risks for the stability of the financial system as well as consumers of financial products and services such as insurance

Climate-related risks to consider

First-order risks arising from weather-related events, such as wildfires, extreme heat and cold, floods and coastal storms

Transition risks


Liability risksPhysical risks

Financial risks arising from the movement to a lower carbon producing economy, including

the re-pricing of carbon-intensive assets

Risks that could arise for corporations or insurance firms from parties who have suffered loss and damage from climate change, and seek to recover

such losses from others

• Physical infrastructure• Coastal communities• Northern communities• Human health and wellness• Ecosystems• Fisheries• Agriculture and food• Forestry• Geopolitical dynamics• Governance and Capacity• Indigenous ways of life• Water

Top climate change risks facing Canada

Source (adapted from)Canada’s Top Climate Change Risks: The Expert Panel on Climate Change Risks and Adaptation Potential (2019)

, as well as periods of higher freshwater levels


12 major areas of climate change risk facing Canada

Top six areas of climate change risk which could involve significant losses, damages, or disruptions in Canada over the next 20 years.

Canada is warming at twice the global rate according to Canada’s Changing Climate Report released in 2019

Climate change is increasingly top of mind for Bank of CanadaIdentified climate change as 1 of 6 vulnerabilities for its impact on Canada’s financial stability for the first time

November ’19 | Bank of Canada outlines its research priorities on the potential impacts of climate change, and indicates it is developing new models to understand climate change impacts on financial stability

March ’19 | Bank of Canada joins the Central Banks’ and Supervisors’ Network for Greening the Financial System (NGFS)

April ’19 | NGFS releases a report called “A call for action: Climate change as a source of financial risk” which identifies scenario analysis and stress testing as tools for integrating climate-related factors into prudential supervision

May ’19 | Bank of Canada lists climate change among the top worries for the economy in the 2019 Financial System Review

June ’19 | Expert Panel on Sustainable Finance releases final report that supports the development of a green taxonomy and use of climate stress tests in Canada

2019


2020

May ’20 | Tiff Macklem is appointed Governor of Bank of CanadaFederal government makes annual climate-related disclosure mandatory for COVID-19 emergency financing

Addressed climate change in: OSFI Annual Report 2018-2019OSFI

• Climate change risk has become an area of increased focus and can have significant impacts on financial institutions and private pension plans.

• OSFI supports the view that institutions should adopt a strategic approach to addressing climate change risk.

• OSFI will be evaluating the progress made by financial institutions in identifying, monitoring, assessing and responding to climate change risk.

• OSFI will be enhancing its knowledge and understanding of the risks, developing supervisory capabilities and assessing the impacts on supervisory practices and guidance.

• OSFI will continue to monitor global developments such as climate change risk, and determine appropriate responses that support overall financial stability.


UK’s PRA has announced that it will delay the launch of its

climate biennial exploratory scenario as it cancelled the

annual stress tests for financial institutions

Bank of England postponed climate

stress testing

Impact from COVID-19

Climate stress tests for financial institutions are comingFinancial regulators are increasingly emphasizing the importance of identification, management and disclosure of climate-related risks


Following the NGFS and French Prudential Supervision and Resolution Authority (ACPR) reports, the Bank of France has announced the arrival of climate change stress tests for French banks and insurers in which they will be subjected to two or three adverse climate scenarios

UK’s Prudential Regulation Authority (PRA) said the 2019 insurance stress test was designed to “capture information about how different firms are exposed to difficult-to-assess risks” such as climate change. Firms must consider the impact of three greenhouse emissions scenarios on their liabilities and assets valuations

The European Central Bank is asking banks to consider climate-related and environmental risks in their governance and risk management frameworks and when formulating and implementing their business strategy in its new guide published for consultation in May 2020

The Australian Prudential Regulatory Authority (APRA) is also in the process of developing climate stress tests that require banks to run risk assessments for their loan books and business models under various climate scenarios

Monetary Authority of Singapore (MAS) is working on incorporating a broader range of climate change-related risks in stress testing scenarios

In its Feb 2020 staff paper, “Stress Testing at the IMF,” International Monetary Fund (IMF) emphasizes stress testing as an important tool for assessing institutions’ resilience to future financial crises

Climate-related challenges and opportunities faced by insurers


Challenges Opportunities

Liabilities side• Limited access to risk information and related risk pricing

difficulties • Public policy, regulatory and legislative issues around

insurability• Lack of awareness about the role of insurance in mitigating

climate-related life and health risks

• Disconnect between climate impact research and modelling and life and health insurance financial models

Assets side• Need for well-defined asset classifications, standards and

methodologies for assessing green investments

• Fragmentation in climate policies and regulations across Canada and globally that impact investors’ confidence

• Lack of appropriate price signals (e.g., carbon price)

• Need for green investment opportunities and structures that better satisfy the insurance industry’s risk appetite

• Availability of data and transparency for informed investing

Liabilities side• Need for stakeholder-relevant products and services

• Better underwriting, pricing, and investment decisionsenabled by climate risk integration

Assets side• Growing capacity of the markets to accommodate large-

scale portfolio allocations to green

• Regulatory emphasis on climate resilience and decarbonisation of the economy

• Demonstration of support for the development of and transition to a sustainable, just and healthy future

Climate change can exacerbate health problems that already exist through negative impacts on environmental conditions, social infrastructure and public health systems

Pathways by which climate change affects health


Source: Fifth Assessment Report of the Intergovernmental Panel on Climate Change (2014)

The health effects of climate change on a global scale are substantial

Global perspective


712 extreme weather events occurred around the world in 2017, resulting in $326 billion (USD) in economic losses; nearly a three-fold increase in economic losses over 2015

157 million more people were exposed to heat waves in 2017 than were exposed in 2000; 3.4 billion weeks of work were lost due to extreme heat

There has been an increase in insect- and water-borne diseases in certain regions of the world

There was a decrease in agricultural yield potential in the 30 countries for which data were available; undernutrition is considered one of the largest health effects of climate change in the 21st century

Examples of health effects of climate changeThe Intergovernmental Panel on Climate Change (IPCC) has identified the effects on health resulting from climate change as:

Increases in atmospheric temperature

Reduced air quality from GHGs

Extreme weather events and changes to weather

Expanded the geographic range of insects and other species due to warming temperatures

• Rise in morbidity and mortality due to heat-related illnesses such as heat stroke, heat edema, heat rash, heat stress, acute cardiovascular disease and renal disease

• Rise in morbidity and mortality due to asthma, ischemic heart disease, stroke, acute lower respiratory infections, lung cancer and chronic obstructive pulmonary disease

• Threats to food security, housing and infrastructure and result in lost income for those affected by the event

• Increasing in prevalence of vector-borne diseases

14

Australia wildfire case studyImpacts on the life insurance industry such as respiratory disorders and mental illness


However, indirect impacts of bushfires can have significant implications on life and health.

Media and research have focused on impacts of natural disasters on communities, and direct loss of life and property

Loss of life from bushfires, for example, is not significant compared to the rest of life insurers’ risk pools – an average of five deaths in

Australia per year1

1 https://www.christiantoday.co.nz/news/bushfires-across-the-nation.html2 https://pubmed.ncbi.nlm.nih.gov/9257516/

Ambient air pollution is a major cause of death and disease globally, with the World Health Organization ranking it the 5th risk factor in mortality and 6th in DALYs (disability-adjusted life years) in 2015. Increase in days of high forest fire risks can be used as a proxy as an increase in air polluted days.

Examples of indirect impacts of bushfires on life and health

Studies find that individuals affected by bushfires, or any natural or man-made disaster, are at risk of long-term mental illness, including anxiety, depression, substance abuse and Post-Traumatic Stress Disorder (PTSD), and often suffering two or more mental comorbidities.2

1515

https://www.christiantoday.co.nz/news/bushfires-across-the-nation.html

https://pubmed.ncbi.nlm.nih.gov/9257516/

Insurers have opportunities to improve long-term climate risk preparedness

Raise the profile of climate risk in the organization

Improve assessment of climate risk using advanced analytics

Take an enterprise-wide view while managing climate risks and providing meaningful disclosures

Work with insureds to alleviate climate risk exposure

1

2

3

4

Copyright © 2020 Deloitte Development LLC. All rights reserved.Navigating climate risk: New opportunities, challenges forinsurers 16 16© 2020 Deloitte owned materials. Confidential. Not for distribution

1. Raise the profile of climate risk in the organization

Action steps for insurers to consider

Establish a clear governance structure, including the creation of dedicated roles to evaluate the impacts of climate-related risks

Embed ongoing climate risk assessment and mitigation efforts across all functions in the company

Make climate risk top of mind for everyone in the organization so that its assessment becomes pervasive during decision-making on products, underwriting, and distribution

An engaged board working closely with senior management on climate issues can sharpen focus across the organization on the risks involved while

assuring adequate resources are allocated to accurately assess and mitigate them

Across industries

2017 Ceresreport

Insurance industry

2017 Ceresreport

Responsibility of sustainability performance assigned to senior executives

65%38%

Insurance industry

2014 Ceresreport

17%


1

2. Improve assessment of climate risk using advanced analytics


Increase external outreach and internal research tobetter understand limitations of current catastrophemodel assumptions

Utilize advanced analytics and visualization tools and augment models with big data to improve risk selection and pricing

Consider partnering with focused InsurTechs to better assess impacts at asset and portfolio level

Current catastrophe models that rely heavilyupon historical loss data may be less useful for future loss projections, given the inherent

uncertainty of a changing climate


2

3. Take an enterprise-wide view while managing climate risks and providinggreater disclosures


Develop and provide more detailed disclosures oforganization-wide risks to various stakeholders

Embed climate risk assessment in the enterprise risk management framework to get a holistic view of actual and potential climate change impact

Conduct organization-wide stress tests of a broad range of plausible climate change scenarios to determine capital and liquidity implications

Enterprise risk management framework

and processes could speed upexposure assessment and

identify mitigation opportunities

Climate risks couldaffect multiple lines of business,

investment performance, and long-term profitability


3

4. Work with insureds to alleviate climate risk exposure


Leverage and support industry-wide efforts toeducate insureds on ways to protect properties against severe weather (e.g. heat, cold, storms, etc.)

Incentivize insureds who invest in mitigating climate-related risks through adaptation measures(noting this is less impactful for life insurers)

Regulators are beginning to suggest that insurers work with their insured on preparedness in the longer term through:

• Educating clients on climate-related risks• Encouraging insureds to adopt risk mitigation

strategies


4

Modelling hypotheses case study

Harry LiManager, Audit & Assurance, Deloitte


Modelling hypotheses


• Water scarcity in vulnerable populations• Knock-on impact of excessive precipitation

Temperature

Precipitation

Secondary effects

Developed Countries

• Mass migration/human conflict• Insects and other disease vectors

• More deaths were caused by extreme cold than by heat • Extreme temperature anomaly vs. gradual temperature increase

• Insured vs. uninsured populations• Gross Domestic Product and healthcare investments

22

Reference climate scenario identification is a key step of the approach, it has to be granular, reliable and complex enough to integrate different kinds of parameters and their impacts

Overview of reference climate scenarios

Climate scenario analysis is an effective tool to help in strategic choices when dealing with uncertainty.

It is essential to determine the level of ambition of the institution and to choose or create a relevant climate scenario.

Adequate climate scenarios should have the following characteristics:

Existing reference climate

scenarios

International Energy Agency (IEA) Scenarios

Non-Governmental Organizations’ Scenarios

InterAcademy Council (IAC) Scenarios

Private sector scenarios (Shell, Exxon, ...)

Based on latest scientific

knowledge

Political, technological and economic viability

Transparent on external data &

hypotheses

Comparable with existing

approaches


A scenario analysis approach helps show medium to long-term risks and opportunities objectively and understandably for insurers

Climate scenarios mechanism

0

1

2

3

4

5

6

Climate Scenario Projections on Global Temperature Increase

(°C)

Qualitative Storyline Assumptions

Historical Data of Selected Parameters

Inputs needed for climate scenarios

Quantification by integrated assessment modeling

Climate Scenario OutputsTailored Scenario Narrative & Pathways

Social, technological, economic, environmental, and policy factors

Trend analyses of historical data taken by reliable data sources

Energy & Economy

Model 4Model

3

Climate

Model 1

Pollution

Model 2

Model 5

Disease

Taking the Highway SSP5

4.7 - 5.1°C

DividedRoad SSP4

3.5 - 3.8°C

Rocky Road SSP3

3.9 - 4.6°C

Middle of the Road SSP23.8 - 4.2°C

Taking the Green roadSSP13 – 3.5°C


*SSP stands for Shared Socioeconomic Pathways

Risk mitigation case study

Carolyn MurnaghanSenior Manager, Risk Advisory, Deloitte



Climate-related risks to consumers and insurers


Impact Area Areas of Actuarial Work Examples

Changes to current mortality and morbidity and uncertainty around future trends

Product Design Reserving • Product Pricing • Capital Management • Reinsurance • Setting long term demographic

assumptions • Explicit allowances of climate change

considerations in mortality and morbidity models

Changes to insurance regulatory environment All • Risk governance • Risk reporting • Corporate level disclosures • Customer / distributor disclosures • Outsourcing arrangements • Capital Management

Overall uncertainty around timing, magnitude and response to climate change

Risk Management/ORSA Pricing Reserving

• Risk governance • Strategic planning • Scenario Analysis • Risk Appetite Frameworks • Capital Management

Source (adapted from): A Practical Guide to Climate Change for Life Actuaries (2019) Institute and Faculty of Actuaries UK


Climate-related risks to consumers and insurers


Impact Area Areas of Actuarial Work Examples

Changes to economic growth and performance in wider economies. Effects of these on the demand for insurance products and their pricing

Product Design Reserving Financial / Strategic Planning

• Product Pricing • Own Risk Solvency Assessment (ORSA)• Longer term financial projections

Changes to investment over or underperformance: whether due to direct climate impacts on specific assets, regulation or restrictions leading to ‘stranded assets’, longer term investment opportunities in capital intensive climate change mitigation or transitions

Investment advice Product Design Reserving Investment Strategy Investment governance

• Product Pricing • Environmental, Social and Governance

(ESG) investments/ Socially Responsible Investments (SRI)

• Setting long term economic assumptions

• Asset Liability Matching • Matching Adjustment • Strategic and tactical asset allocations • Mark to model asset valuation of long-

term illiquid investments such as mortgages

Source (adapted from): A Practical Guide to Climate Change for Life Actuaries (2019) Institute and Faculty of Actuaries UK

Physical risks and transition risks impact the availability and pricing of traditional risk mitigation assumed in scenario-based analyses, the main challenges are as follows:

Challenges for risk mitigation for consumers and insurers

Insurance availabilityFuture insurance availability may decline significantly for geographies and/or exposure/risk types

This may make insurance inaccessible to certain consumer groups

Re-insurance capacity and pricing

Future reinsurance capacity may decline significantly for geographies and/or exposure/risk types

This may reduce the ability of insurers to manage their risk, thereby increasing pricing and/or reducing availability

Insurance pricingFuture insurance pricing may increase significantly for geographies and/or exposure/risk types

This may price out certain consumer groups


Covid-19 and Climate change

Joe SollyDeloitte Partner, Sustainability & Climate Change


Lessons learned from COVID-19


‘Flattening the curve’ as early as possible helps build adaptation capacity and it requires collective action to do so

Many of the root causes of climate change also increase the risk of pandemics

Climate still is, and will continue to be, top-of-mind for the Canadian government, as evidenced by the climate disclosure requirement for government aid eligibility and the recent appointment of Tiff Macklem to the Bank of Canada

Climate change impacts how we relate to other people, animals and nature, and that impacts our health and our risk for infections

Deforestation Loss of habitat

Large livestock farms Water quality impacts

Air pollution

30

Both COVID-19 and climate change are deadly


Green recovery from COVID-19 is essential to reduce and build resilience against systemic risks of climate change for life and health

1 As of June 8, 20202 World Health Organization (2018)

397,000+Recorded deaths from COVID-191

Estimated additional deaths between 2030 and 2050 due to climate change2

5,000,000

“Climate change is the No.1 threat to global health.”- World Health Organization

31

Questions


Thank you

Joe SollyPartnerSustainability & Climate ChangeM: +1 647 388 [email protected]


Carolyn MurnaghanSenior ManagerFinancial ServicesM: +1 437 216 [email protected]

Harry LiManagerFinancial ServicesM: +1 647 326 [email protected]

Contact Information




Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services. Deloitte LLP, an Ontario limited liability partnership, is the Canadian member firm of Deloitte ToucheTohmatsu Limited.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

The information contained herein is not intended to substitute for competent professional advice.

© Deloitte LLP and affiliated entities.

Appendix


SSPs derive greenhouse gas emissions scenarios with different climate policies

Shared Socioeconomic Pathways (SSP) are scenarios of projected socioeconomic global changes up to 2100


SSP 1Emissions peak between 2040 and 2060 – even in the absence of specific climate policies, declining to around 22 to 48 gigatonnes of CO2 (GtCO2) per year by 2100. This results in 3-3.5C of warming by 2100.

SSP 2Emissions continue to increase through the end of the century, reaching between 65GtCO2 and 85GtCO2, with resulting warming of 3.8-4.2C.

SSP 3Models show a wide range of possible baseline emissions, with most runs showing increases up to around 76-86GtCO2 by 2100, but one model1having emissions of 129GtCO2, the highest of any SSP. These differences relate to access to economically recoverable oil. Warming in 2100 in SSP3 is estimated at 3.9-4.6C.

SSP 4Despite its high inequality, emissions are relatively low in due to rapid technological progress on low-carbon energy sources. SSP4 emissions range from 34GtCO2 to 45GtCO2 by 2100, with warming of 3.5-3.8C.

SSP 5The high-growth energy-intensive SSP5 shows the most overall emissions of any SSP, ranging from 104GtCO2 to 126GtCO2 in 2100, resulting in warming of 4.7-5.1C.

Soc

io-e

con

omic

ch

alle

ng

esfo

r m

itig

atio

n

Socio-economic challengesfor adaptation

SSP 5(Mitigation challenges

dominate)Fossil-fueled development

Taking the highwaySSP 2

(Medium challenges to mitigation and adaptation)

Middle of the road

SSP 1(Low challenges)

SustainabilityTaking the Green Road

SSP 3(High challenges to

mitigation and adaptation)Regional rivalry

A Rocky Road

SSP 4(Adaptation challenges

dominate)InequalityA Road Divided

1 http://data.ene.iiasa.ac.at/message-globiom/

http://data.ene.iiasa.ac.at/message-globiom/

The SSPs are based on five narratives of socioeconomic trends that could shape future society


Source: https://www.sciencedirect.com/science/article/pii/S0959378016300681

SSP 1 Sustainability – Taking the Green Road (Low challenges to mitigation and adaptation)The world shifts gradually, but pervasively, toward a more sustainable path, emphasizing more inclusive development that respects perceived environmental boundaries. Management of the global commons slowly improves, educational and health investments accelerate the demographic transition, and the emphasis on economic growth shifts toward a broader emphasis on human well-being. Driven by an increasing commitment to achieving development goals, inequality is reduced both across and within countries. Consumption is oriented toward low material growth and lower resource and energy intensity.

SSP 2 Middle of the Road (Medium challenges to mitigation and adaptation)The world follows a path in which social, economic, and technological trends do not shift markedly from historical patterns. Development and income growth proceeds unevenly, with some countries making relatively good progress while others fall short of expectations. Global and national institutions work toward but make slow progress in achieving sustainable development goals. Environmental systems experience degradation, although there are some improvements and overall the intensity of resource and energy use declines. Global population growth is moderate and levels off in the second half of the century. Income inequality persists or improves only slowly and challenges to reducing vulnerability to societal and environmental changes remain.

SSP 3 Regional Rivalry – A Rocky Road (High challenges to mitigation and adaptation)A resurgent nationalism, concerns about competitiveness and security, and regional conflicts push countries to increasingly focus on domestic or, at most, regional issues. Policies shift over time to become increasingly oriented toward national and regional security issues. Countries focus on achieving energy and food security goals within their own regions at the expense of broader-based development. Investments in education and technological development decline. Economic development is slow, consumption is material-intensive, and inequalities persist or worsen over time. Population growth is low in industrialized and high in developing countries. A low international priority for addressing environmental concerns leads to strong environmental degradation in some regions.

SSP 4 Inequality – A Road Divided (Low challenges to mitigation, high challenges to adaptation)Highly unequal investments in human capital, combined with increasing disparities in economic opportunity and political power, lead to increasing inequalities and stratification both across and within countries. Over time, a gap widens between an internationally-connected society that contributes to knowledge- and capital-intensive sectors of the global economy, and a fragmented collection of lower-income, poorly educated societies that work in a labor intensive, low-tech economy. Social cohesion degrades and conflict and unrest become increasingly common. Technology development is high in the high-tech economy and sectors. The globally connected energy sector diversifies, with investments in both carbon-intensive fuels like coal and unconventional oil, but also low-carbon energy sources. Environmental policies focus on local issues around middle and high income areas.

SSP 5 Fossil-fueled Development – Taking the Highway (High challenges to mitigation, low challenges to adaptation)This world places increasing faith in competitive markets, innovation and participatory societies to produce rapid technological progress and development of human capital as the path to sustainable development. Global markets are increasingly integrated. There are also strong investments in health, education, and institutions to enhance human and social capital. At the same time, the push for economic and social development is coupled with the exploitation of abundant fossil fuel resources and the adoption of resource and energy intensive lifestyles around the world. All these factors lead to rapid growth of the global economy, while global population peaks and declines in the 21st century. Local environmental problems like air pollution are successfully managed. There is faith in the ability to effectively manage social and ecological systems, including by geo-engineering if necessary.

https://www.sciencedirect.com/science/article/pii/S0959378016300681

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