Actuaries and Climate Change: Insights From Economic Theory

As with any large complex system involving multifaceted parameters and processes, our planet’s climatological system is a network of interconnections and interrelationships. Actuarial science, perhaps the ultimate interdisciplinary field, is well-positioned to add value to the study of climate change and its potential socioeconomic impact. The actuary’s quantitative and analytical skills, along with an understanding of economic and financial processes, provide a basis for better measuring and evaluating the risks posed by global warming. In addition, with the emergence of enterprise risk management over the last twenty years, actuaries have become accustomed to analyzing the risk inherent in complicated organizations and systems on a holistic basis, something that is critical to an appreciation of the implications from climate change.

In this essay, three possible avenues for future actuarial innovation and research are suggested, each based on economic and financial theory. First, the implications for evaluating organizational decisions within an option pricing framework are described. Second, behavioral incentives and tax policy are considered. Finally, the value of climate change indices within market-based systems is discussed.

Keywords: Climate Change, Enterprise Risk Management,