Actuary's role in climate change

a workshop of D.I.A.F Vietnam
http://assodiaf.org/

Transcript

1. Actuary’s role in climate change DIAF Vietnam KHONG Duc Tho NGO Duc Hoang Lan NGUYEN Quang Trung NGUYEN Dang Diep HA Thi Phuong Anh
2. Contents 1. What do we mean climate change and the urgency to take action 2. Actuary’s role in unstable weather patterns  Actuary – who are we?  Actuarial insight for weather problems and our responses  What have we achieved 3. Case study: Actions to the impacts of climate change on agriculture in Vietnam  Brief introduction to Vietnam  Impacts of climate change on agriculture in Vietnam  Vietnam agricultural insurance market review  Actions and proposals of actuaries to solve the problem
3. Contents 1. What do we mean climate change and the urgency to take action 2. Actuary’s role in unstable weather patterns  Actuary – who are we?  Actuarial insight for weather problems and our responses  What have we achieved 3. Case study: Actions to the impacts of climate change on agriculture in Vietnam  Brief introduction to Vietnam  Impacts of climate change on agriculture in Vietnam  Vietnam agricultural insurance market review  Actions and proposals of actuaries to solve the problem
4. Definition • Also known as global warming • Increase in average temperatures of the oceans and the atmosphere • At global level, for sixty years.
5. The causes of climate change Trapping excess carbon in Earth’s atmosphere
6. Consequences • Environmental consequences • Extinction of the area and flora • Floods, droughts and intensification of tropical storms • Consequence of global warming on agriculture • Changing the Gulf Stream • Geopolitical and human consequences • Islands and coastal regions threatened • Migratory flows and political consequences • Consequence of global warming on agriculture
7. Contents 1. What do we mean climate change and the urgency to take action 2. Actuary’s role in unstable weather patterns  Actuary – who are we?  Actuarial insight for weather problems and our responses  What have we achieved 3. Case study: Actions to the impacts of climate change on agriculture in Vietnam  Brief introduction to Vietnam  Impacts of climate change on agriculture in Vietnam  Vietnam agricultural insurance market review  Actions and proposals of actuaries to solve the problem
8. 2. Actuary’s role in unstable weather patterns Who’s an actuary? Definition: Actuaries have strong knowledge in:  Mathematical  Probability and statistic  Computer science  Economics and risk management Actuaries manage risk:  Forecast potential risk  Estimate loss  Help organization plan to avoid loss  Actuaries work in every domains where the risk may exist: Insurance, finance, agriculture, industry, medical,…
9. Contents 1. What do we mean climate change and the urgency to take action 2. Actuary’s role in unstable weather patterns  Actuary – who are we?  Actuarial insight for weather problems and our responses  What have we achieved 3. Case study: Actions to the impacts of climate change on agriculture in Vietnam  Brief introduction to Vietnam  Impacts of climate change on agriculture in Vietnam  Vietnam agricultural insurance market review  Actions and proposals of actuaries to solve the problem
10. Actuarial insight for weather problems and our responses Why do we need actuaries for climate change? The climate change can effect all of the mentioned domains: - Agriculture: crops damages, unstable food supplies by flood, typhoon,… - Medical: physical damages, mortality, pandemic by earthquake, tsunami,… - Other domains: Infrastructure destroyed, biological diversity,…  Climate change is the root of many potential risks  Mission for actuaries Domain Life and Health Property & Casualty Other - Agriculture - Medical - Biology - Economics - etc. - Mortality rate - Pandemic - Mutant gene - etc. - Crops damages - Decreasing livestock - Infrastructure destroyed - etc. - Biological diversity - Unstable food supplies - etc.
11. Role of actuaries What can an actuary do? Climate science • Collaborating with climatologists Risk manager • Forecasting risk • Avoiding risk by insurance and financial products Policies maker • Government advisory
12. Contents 1. What do we mean climate change and the urgency to take action 2. Actuary’s role in unstable weather patterns  Actuary – who are we?  Actuarial insight for weather problems and our responses  What have we achieved 3. Case study: Actions to the impacts of climate change on agriculture in Vietnam  Brief introduction to Vietnam  Impacts of climate change on agriculture in Vietnam  Vietnam agricultural insurance market review  Actions and proposals of actuaries to solve the problem
13. Contributions of actuaries against climate change a/ Contributions in researches on climate change  A group of insurers and reinsurers participating in the Risk Prediction Initiative in Bermuda including multiples insurers (including AIG, AON Corp, Chubb, Employers Re, General Re, and Tillinghast-Towers Perrin) supports to improve actuarial methods for assessing climate-related risks beyond the period of claims histories.
14. Contributions of actuaries against climate change a/ Contributions in researches on climate change  Many researches in actuarial sciences in the relation between weather-related elements and mortality: i. Kalkstein, L.S. and J.S.Greene, (1997): An Evaluation of Climate/Mortality Relationships in Large U.S. Cities and the Possible Impacts of a Climate Change; ii. Environmental Health Perspectives, 105(1):84-93 and Moore, T., (1996): Health and Amenity Effects of Global Warming Revised May 30, 1996 iii. etc. Source: The University of Edinburgh
15. Contributions of actuaries against climate change b/ Acting against climate change through insurance and banking product design Swiss Re Corporate Solutions has cooperated with some others organizations to offer drought insurance to Kenya seed growers, helping to pay USD 160,000 after drought and storms strike until 12/2013. Research of MFIs in Bangladesh 2009 shows that even during and after a major flood, clients did not want to draw down their savings as that would reduce the size of their loans and make them vulnerable in case the situation get even worse. Green Investments of MFIs following the example of Vietnamese Red Cross to finance planting 12,000 ha of mangrove trees to protect the sea dike; or investment of MFIs in water supply system in Bangladesh.
16. Contributions of actuaries against climate change b/ Acting against climate change through insurance and banking product design • Munich Re has integrated the effects of climate change into hurricane models and the economic effect in demand for construction materials following a hurricane. • AIR Worldwide Corporation has been integrating sea surface temperatures into loss models for tropical cyclone. • Green loans with lower interest rates for client who purchase new energy efficient houses. • “Pay as you drive” insurance policies that offer discounts for those who drive less (then reduce emissions).
17. Contributions of actuaries against climate change c/ Supervisors for policy makers and regulators  Green fiscal funds, green investment funds: citizens purchasing shares in green fund or investing money in green banks receive an income tax discount, while banks can offer green loans at lower cost.  Ex: Rabobank’s green fund had acquired 63,000 investors and provided €2 billion in green loans. We can also list some “green” banks: New Resource Bank in San Francisco, Green Bank in Houston, GreenChoice Bank in Chicago, UK Green Investment Bank.  Flood Re (long-term flood reinsurance scheme in the UK): an agreement between UK insurers and the government to develop a not-for-profit flood risk reinsurance pool which is run and financed by insurers.
18. Contents 1. What do we mean climate change and the urgency to take action 2. Actuary’s role in unstable weather patterns  Actuary – who are we?  Actuarial insight for weather problems and our responses  What have we achieved 3. Case study: Actions to the impacts of climate change on agriculture in Vietnam  Brief introduction to Vietnam  Impacts of climate change on agriculture in Vietnam  Vietnam agricultural insurance market review  Actions and proposals of actuaries to solve the problem
19. General Information - Tropical country - More than 3260 km coast - 87 million(*) of population - Agricultural information - 70 % of Vietnamese earn a living from farming - 21%(*) of GDP 2011 - 2 large river deltas: Red (North)and Mekong (South) - Agricultural products: paddy rice, coffee, rubber, cotton, tea, pepper, soybean, cashew, sugar cane, peanut, banana; poultry; fish, seafood (*) http://ricepedia.org/vietnam 1 dot = 5000 ha Agricultural resources distribution
20. Rice industry  Information: - 7.5 million ha (*) - 50% of agricultural product - World’s fifth-largest rice-producing country (40 million tones/y) - World’s leading rice exporters (6.9 million tones/y)  Working method:  Manual  Individual level  Dependence to weather and season (*) 2010 - http://ricepedia.org/vietnam
21. Contents 1. What do we mean climate change and the urgency to take action 2. Actuary’s role in unstable weather patterns  Actuary – who are we?  Actuarial insight for weather problems and our responses  What have we achieved 3. Case study: Actions to the impacts of climate change on agriculture in Vietnam  Brief introduction to Vietnam  Impacts of climate change on agriculture in Vietnam  Vietnam agricultural insurance market review  Actions and proposals of actuaries to solve the problem
22. Climate change scenarios and impact to Vietnam(*) • Climate change scenarios(2100 – compared to 1999) - Increase temperature –by 1.5oC – 3oC - Increase Rainfall: by 4.8 to 8 % - Sea level rise: 65 to 100 cm - Natural catastrophic: storm, drought … • Possible impacts - Change in temperature period => risk for growing season - Crop growth rate for Agricultural product - Crop water demand - Crop geographic distribution - Impacts of sea-level rise: - Annual rice output may drop by several million tones. - Millions of people living in low-lying areas would be forced (*) FAO – 2011
23. Rice Distribution Area and sea level rise problem Rice Distribution Area 50% land lost caused by sea level rise at 1m scenario
24. Natural catastrophic Drought Storm Lost season
25. 3. Case study in Vietnam  Climate change threats to lead agricultural producers to poverty and affects stable food supply  Solution to adapt and mitigate the risks related to climate change : Agricultural insurance
26. Contents 1. What do we mean climate change and the urgency to take action 2. Actuary’s role in unstable weather patterns  Actuary – who are we?  Actuarial insight for weather problems and our responses  What have we achieved 3. Case study: Actions to the impacts of climate change on agriculture in Vietnam  Brief introduction to Vietnam  Impacts of climate change on agriculture in Vietnam  Vietnam agricultural insurance market review  Actions and proposals of actuaries to solve the problem
27. 3. Case study in Vietnam  Vietnam agricultural insurance market review Crop insurance Poultry insurance Livestock insurance Aquaculture insurance Forestry insurance
28. 3. Case study in Vietnam  Vietnam agricultural insurance market review – Insurance companies’ side  Before 2011: The long history of failing in agriculture insurance  Crop insurance 1983 – 1999: Failure of Bao Viet insurance program on paddy (0,62M USD premium vs 0,69M USD compensation) 2001 – 2009: Losing continuously of Groupama’s scheme on crop  Livestock insurance From 1996: Bao Viet implemented livestock insurance in some provinces but the demand was too low to continue 2002: Participation of Groupama in the Mekong Delta region 2005: Groupama expended the insured region but limited only cows and pig 2010: Bao Viet offered traditional livestock mortality insurance cover
29. 3. Case study in Vietnam  Vietnam agricultural insurance market review– Insurance companies’ side  Before 2011: The long history of failing in agriculture insurance  Poultry insurance No information  Aquaculture insurance 2002: Groupama insured shrimp farming in the Mekong Delta region 2005: Groupama failed to continue  Forestry insurance From 1996: Bao Viet insured forest and rubber plantations for a limited area
30. 3. Case study in Vietnam  Vietnam agricultural insurance market review– Insurance companies’ side  In 2012: Most of insurance companies report loss in agricultural insurance service Table: Revenue of agricultural insurance in Vietnam 2007 – 2012 Source: Ministry of Finance (2013) 2007 2008 2009 2010 2011 2012 Proportion of agricultural insurance (%) 0,01 0,02 0,01 0,05 0,08 1,18 Revenue (billion VND) 17,696 21,253 25,510 30,605 36,574 41,246 Indemnity (billion VND) 3,033 4,598 5,267 6,293 8,736 8,855 Retained indemnity (billion VND) 2,401 3,393 3,947 4,738 6,719 6,031 Indemnity rate (%) 30,71 37,60 36,12 36,04 42,26 36,09
31. 3. Case study in Vietnam  Vietnam agricultural insurance market review – Government’s side  2011 – 2013: The government pilot insurance program for agriculture in 20 provinces  Cover 4/5 insured classes with premium subsidies up to 100% (The rice scheme is yield index-based, the livestock, poultry and aquaculture schemes are indemnity based)  Institutional arrangement Ministry of Finance & Ministry of Agriculture and Rural Development Provincal People’s Committes Insurance companies National Corporation for Reinsurance
32. 3. Case study in Vietnam  Vietnam agricultural insurance market review  27 June 2014: Pilot agriculture insurance review - reported having losses  Premium: 394 billion VND (218,175 billion for aquaculture, 91,919 billion for rice and 82,9 billion VND for animals)  Compensation: 701,8 billion VND (669,5 billion for aquaculture, 19 billion for rice and 13,3 billion for animals)  2014: Ministry of Finance brings into action aquaculture insurance products for hull, fishing tool and fisherman with the subsidy from the State up to 100%
33. Contents 1. What do we mean climate change and the urgency to take action 2. Actuary’s role in unstable weather patterns  Actuary – who are we?  Actuarial insight for weather problems and our responses  What have we achieved 3. Case study: Actions to the impacts of climate change on agriculture in Vietnam  Brief introduction to Vietnam  Impacts of climate change on agriculture in Vietnam  Vietnam agricultural insurance market review  Actions and proposals of actuaries to solve the problem
34. An institutional structure proposed by Ford Foundation in a study about developing agricultural insurance in Vietnam
35. => Actuarial skills and information can contribute in all levels of the structure
36. Developing weather index based crop insurance  Inclination: - Failure of traditional Crop Insurance - Support appropriate climate change strategies - Successful lessons of developing weather index based crop insurance in developing countries - + In India, China, Mexico, etc.  Definition Weather Index insurance is a simplified form of insurance, where payments are made based on an important weather variable  Avantages - More adaptable to small scale farms - Less information requirements - No loss adjustment (indemnities are paid only by observing the underlying index) - Reduce moral hazard and Adverse Selection => Actuaries can help in analyzing weather data to suggest new products, in building actuarial models to pricing, reserving and controling
37. Action in the reinsurance  Roles of reinsurance in the insurance against climate changes:  Need of large capital reserving for future events is the characteristics of insurance product against climate changes  Importance of use of reinsurance/coinsurance, help the companies have the support of required capital  1st material to transfer the risk. It helps to encourage all the insurance market: the risk is transfered over the country or maybe outside the country, all insurance companies have posibilities to participate in the business.  One of the keywork to develop the agriculture insurance market in VN
38. Action in the reinsurance  Situation of reinsurance in VN  List of reinsurers in VN and their market share/ volume  The high frequency of natural disasters prompted insurance companies to increase the percentage of premium ceded to reinsurers. (data about ceded risk)  High frequency of sinisters demands changes of regulation from the government about the required capital => need of support from reinsurance => Need of a risk pooling system for coinsurance – reinsurance over the country in order to encourage the insurance market in term of liquidity.
39. How to apply reinsurance? Any proposal? Zoom in risk pooling
40. Zoom in risk pooling  Avandtage from the risk pooling  The risk are share over the country  Encourage small company to run business. Then develop the entire market  Create a nature for insurance – reinsurance market  Roles of actuaries in the risk pooling  In which steps actuaries will help?  Challenge:  Need of important investment in rule and control from government
41. Final thought… Why not a collaboration among Asian countries to share and provide help immediately in the event of catastrophe? (Refer to the lesson of Caribbean Catastrophe Risk Insurance Facility CCRIF 6/2007)