The Actuary's Role in the Climate Landscape: A Framework for Insurers, Banks and Pension Funds

The climate conversation inside a financial institution tends to take one of two forms. Either it stays in the sustainability function — focused on disclosure, metrics, and reputation — or it stays in the risk function, focused on catastrophe modelling and capital overlays. Neither framing is wrong. Both are incomplete. Climate change affects every core function of an insurer, bank or pension fund, and the actuarial team sits at the intersection of most of them.

Through the ASSA Climate Change subcommittee work I’ve been part of, one of the persistent gaps we’ve seen is a clear articulation of where actuarial judgement actually matters across different institution types. The contribution varies by institution and by function, but the underlying skills — probability, long-horizon projection, scenario thinking, capital modelling — are the same. The framework below is a working map.

The Institution × Function Matrix

Function	Life Insurer	Short-Term Insurer	Bank	Pension Fund
Underwriting / Origination	Mortality and morbidity assumptions under heat, air quality and disease shift	Catastrophe pricing, peril mapping, exclusions	Credit underwriting for climate-exposed sectors	n/a
Reserving / Claims	Longevity and disability development under shifting health risks	IBNR and cat-reserve adequacy for new peril patterns	Expected credit loss under IFRS 9	n/a
Investments / ALM	Asset-liability matching under transition-driven repricing	Short-duration asset pool and liquidity	Banking book valuation, collateral revaluation	Strategic asset allocation, stranded-asset exposure
Capital	SAM internal model climate overlay	SAM standard-formula catastrophe add-on	Basel climate risk capital, scenario-driven Pillar 2	Solvency or funding-level projection
Disclosure	IFRS S2, PA governance, TCFD	IFRS S2, PA governance, TCFD	IFRS S2, climate stress tests, TCFD	IFRS S2, trustee reports, member communications

Each cell represents a specific actuarial workstream. What differs across the rows is the instrument; what differs across the columns is the time horizon and the cash-flow structure. A life insurer’s concern is a seventy-year liability meeting a shifting climate path. A short-term insurer’s concern is next year’s reinsurance renewal meeting a hardening catastrophe market. A bank’s concern is a ten-year corporate loan meeting a transition-risk revaluation. A pension fund’s concern is a multi-decade liability meeting an asset portfolio whose long-run return assumption depends on the climate pathway actually realised.

1. Insurers — Life and Short-Term

For insurers, the most obvious climate exposure is on the short-term book: property, motor, agriculture, engineering. The catastrophe models carry the burden of translating climate science into expected losses, and the reinsurance programme carries the burden of transferring the tail. Where actuaries add value is in the space between the cat model and the priced premium — in the assumptions about hazard trends, exposure growth, and vulnerability evolution that the vendor model does not automate.

For life insurers, the exposure is quieter and longer. Mortality and morbidity patterns shift under heat stress, air-quality deterioration, and shifting disease vector ranges. Disability income claims rise with heat-sensitive occupational exposure. Longevity trends interact with healthcare access and adaptation capacity. None of these show up as a dramatic single-year event. All of them compound over the thirty-to-seventy-year horizons the life book runs.

On the asset side, both insurer types are exposed to transition-driven repricing. Short-term insurers feel it quickly, through the income statement, because asset durations are shorter. Life insurers feel it more slowly but over a larger portion of the balance sheet. The SAM market-risk module is the direct quantification vehicle for both.

2. Banks

Banks come to climate risk with a different toolkit — IFRS 9 for expected credit loss, Basel for capital, ICAAP and climate stress tests for supervisory review. The actuarial contribution is less established than in insurance, but the analytic problem is closely related: project long-horizon loss distributions under defined scenarios, and translate those distributions into capital and provisions.

The South African banks that have engaged climate risk seriously are using scenario-aligned loss curves for their loan portfolios, with sector-specific transition assumptions (coal, mining, cement) layered onto the baseline ECL model. The IFRS 9 forward-looking element is where climate enters the financial statements. Actuarial input here is on scenario design, probability-weighting, and the translation of macroeconomic scenario variables into sector-level loss rates.

The transition exposure in SA banking is concentrated — coal finance, mining, agriculture, and a handful of listed corporate counterparties. The physical exposure is broader — mortgage books in flood-exposed areas, agricultural finance under drought, infrastructure lending where municipal adaptation is constrained. Neither exposure is adequately captured by a standard-formula approach; both require scenario-based extensions.

3. Pension Funds

Pension funds face the cleanest version of the problem and often the weakest toolkit to address it. The liability is very long dated and inflation linked. The asset mix is typically diversified across listed equity, fixed income, property, and alternatives. Climate risk flows through the asset side primarily: transition risk reprices listed equity and fixed income, physical risk impairs property and infrastructure holdings, and the long-run return assumption underlying the funding position is conditional on the climate pathway realised.

Trustee boards rarely have the in-house actuarial capacity to run this analysis themselves, which means the valuation actuary and the investment consultant together carry the weight. The practical first step is a stranded-asset and transition-sensitivity analysis on the current asset allocation, followed by a forward-looking scenario projection of the funding position under contrasting climate pathways. This analysis does not need to be internal-model grade. It does need to exist, and to be revisited annually.

Where the Actuarial Function Fits

The through-line across all four institution types is that climate risk is not a new discipline but a new context for existing disciplines. Underwriting, reserving, asset-liability management, capital modelling, and disclosure are all pre-existing actuarial competencies. Climate risk is a driver that reshapes the assumptions underneath each.

What is new is the integration requirement. Historically, the catastrophe team, the investment team, the capital team and the disclosure team could operate with relatively weak coupling. Climate risk forces the coupling: the same scenario has to flow through the catastrophe model, the asset valuation, the capital calculation, and the external disclosure. Internal inconsistency — a climate overlay in the ORSA that does not match the scenario in the IFRS S2 disclosure, or a stress test that uses different temperature assumptions from the capital overlay — is where reviewers are increasingly focused.

The actuarial function is structurally the right home for that integration work. The profession is trained on long-horizon projection, probability, and consistency of assumptions across interlinked models. The role for the actuary in the climate landscape is not to become a climate scientist. It is to ensure that the climate scientist’s outputs flow correctly into the assumptions that drive balance-sheet decisions, and that those assumptions are used consistently across the institution.

The ASSA Climate Change subcommittee’s work has converged on a similar conclusion: start with the institution-and-function matrix, identify which cells are material for a given organisation, and build the actuarial workstream for each in turn. It is slower than the one-big-framework approach that some institutions favour, but it produces analysis that survives regulatory review and informs actual management decisions. That is the standard the profession should hold itself to on climate risk.