Global high impact risks, the actuarial profession and policy implications

Transcription

1 Challenges Global Foundation Global high impact risks, the actuarial profession and policy implications Nick Silver Founder and director of the Climate Bonds Initiative (CBI) Global Challenges Foundation

2 ations only Risk of Ruin Global high impact risk, the actuarial profession and policy implication Nick Silver September The Actuarial Profession

3 Institute and Faculty of Actuaries Long term risk managers Risk management research and development thought leadership Resource and environment board Legislative requirement for insurers 1 in 200 year event Applying thinking to wider fields (e.g. food, energy, nuclear decommissioning) 2011 The Actuarial Profession 3

4 Hypothetical Example Insurance Company Losses 1 in 200 level 1.2E-08 Probability Distribution for Insurance Company Losses 1E-08 8E-09 Probability 6E-09 4E-09 Loss 1 in 200 2E ,000 Miljontal Losses 2011 The Actuarial Profession 4

5 Capital modelling as a logical framework The regulatory regime A regulatory regime is required because of: Asymmetric information Systemic risks Adverse incentives The regulatory regime has developed/evolved with time Regime generally works Determine by professionals with duty to act in the public interest 2011 The Actuarial Profession 5

6 Capital modelling as a logical framework The regulatory regime The regulatory regime protects policyholders, ensure financial stability and keep risks within acceptable boundaries. Climate change; people will face uncertain but possible catastrophic risks, More important than protecting policyholders! Definition of the climate ruin scenario is a choice The Actuarial Profession 6

7 Trend in Climate Science? As climate science develops, impacts look worse The Actuarial Profession From: J.B.Smith et al PNAS

8 What are large scale discontinuities? Most vulnerable Methane release? From Lenton et al, PNAS 2008, Tipping Elements in the Earth s Climate System

9 Report for the World Bank: Why a 4 C warmer world must be avoided 4 C warmer world would mean: Possible large-scale displacement of populations with adverse consequences for human security and economic and trade systems. Risk of crossing thresholds of nonlinear tipping elements in the Earth system e.g. disintegration of West Antarctic ice sheet leading to rapid sea-level rise. There might also be nonlinear responses within particular economic sectors to high levels of global warming e.g. on crop yields. A 4 C world is likely to be one in which experiences severe disruptions, damage, and dislocation, Given uncertainty remains about the full nature and scale of impacts, there is no certainty that adaptation to a 4 C world is possible. Source: Turn_Down_the_heat_Why_a_4_degree_centrigrade_warmer_world_must_ be_avoided.pdf 9

10 What is the ruin probability for climate change? Use the concept of climate sensitivity. The amount of warming expected at equilibrium of the climate system, for a given amount of greenhouse gas forcing. Normally calibrated to double carbon dioxide i.e. double CO2 from the pre-industrial 280ppm to 560ppm. Warming comes from direct effect of CO2, plus feedbacks. The 2007 Intergovernmental Panel on Climate Change 4 th assessment report, advised that equilibrium climate sensitivity to doubled CO2 was between C, with a probability of 2/3rds The Actuarial Profession 10

11 Estimated Global Average Temperature Rise at Equilibrium of Fast Feedbacks Atmospheric carbon dioxide concentration, ppm But, the yellow area is the 68% confidence interval for climate sensitivity This gives an unacceptably high 16% tail probability. Source: Nature 2012 doi: /nature11574 PALEOSENS project members 11

12 Plot the 95% Confidence interval for Climate Sensitivity 8.0 Global Average Temperature Rise, C, Versus preindustrial % confidence interval 68% confidence interval Stabilisation level of atmospheric Carbon Dioxide, parts per million Source: Nature 2012 doi: /nature11574 PALEOSENS project members 12

13 Read off the carbon dioxide concentration 8.0 Global Average Temperature Rise, C, Versus preindustrial Stabilisation level of atmospheric Carbon Dioxide, parts per million 2.5% Tail For a 2.5% chance of exceeding 4C global average temperature rise CO2 stabilization target is 415ppm 13

14 BUT, the slow feedbacks lead to higher warming, in the long term All conventional climate policy assumes that fast feedback sensitivity is relevant What about the risk that slow feedbacks are relevant to us? Source: Nature 2012 doi: /nature11574 PALEOSENS project members 14

15 Conclusions 1. The carbon dioxide already released into the atmosphere carries an unacceptable risk of severe climate change. 2. Rapid decarbonisation of the economy is the correct risk management response. 3. Probability of political process succeeding too low and too slow 4. Will need to remove CO2 from the atmosphere 2011 The Actuarial Profession 15

16 Recommendations 1. Global governance/regulatory regime cultural theory of risk 2. Clean technology economically viable 3. How to get finance at scale 4. R&D into CO2 sequestration from atmosphere, with particular emphasis on financing 2011 The Actuarial Profession 16