South African life and health actuaries are starting to assess the potential long-term impact of climate change on the health and well-being of policyholders and what this could mean for the claims experience of life and health insurers.
Pamela Hellig, a life insurance actuary and member of the Actuarial Society of South Africa (ASSA), says although the short-term insurance industry is already experiencing the impact of extreme weather events such as floods, wildfires and rising sea levels, the potential impact of climate change on life and health insurers is not well understood.
According to Hellig, life and health insurers worldwide are grappling with modelling and quantifying climate-related risks and calculating insurance liabilities within a “tornado-sized funnel of doubt” because potential impacts are not immediate and less evident than in the short-term space.
However, given the increasing attention climate change is attracting from stakeholders, including the Prudential Authority, insurers are under pressure to incorporate climate change risk into their risk governance, risk management, and Own Risk and Solvency Assessment (ORSA) processes.
A group of South African actuaries, including Hellig, is therefore leading the development of a framework designed to assist life and health actuaries in assessing and quantifying the potential impact of climate change on the health and well-being of policyholders.
The actuaries formed the Climate Change Impacts on Mortality and Morbidity Working Party under the auspices of the ASSA Climate Change Committee in 2023 and recently published the first iteration of the Mortality and Morbidity Impact Assessment Framework. Hellig emphasises that the framework is intended as a living tool that evolves in line with climate change developments and the needs of the industry.
The framework follows the release of groundbreaking research in 2024 by a subset of the working party, which investigated the potential impact of extreme temperatures on the mortality of South African policyholders. The research overlaid historical weather data with the claims data of 92 000 pensioners and 700 000 lives covered under funeral policies. Hellig explains that this research, together with the new framework, provides a solid foundation for assessing potential climate change risks on insured lives.
“It may be the case that climate change is not expected to have a material impact on the mortality and morbidity of insured lives in South Africa, but insurers need to be able to justify their assumptions and provide evidence that a proportionate, risk-based assessment was performed to arrive at this conclusion,” says Hellig.
She adds that as a start, insurers can use the framework to inform a relatively simplistic climate change risk assessment, with the aim of developing a more sophisticated and quantitative approach as the industry’s understanding of climate-related risk and its impact on liabilities matures, and as gaps in data and modelling approaches are addressed.
Guiding assumptions
The measurement and management of mortality and morbidity risks are key to the work of actuaries developing products, calculating liabilities and managing capital in the life insurance and healthcare space, says Hellig. Therefore, she adds, it is essential for actuaries to begin assessing and, where possible, quantifying the impact of these risks under climate change scenarios and preparing for their consequences.
Identified as particularly vulnerable to the impact of climate change because of its geographical location and state of socio-economic development, South Africa faces unprecedented risks that may have a significant effect on the health and well-being of people living in areas most exposed, says Hellig.
Hellig says the recently published framework lists examples of extreme climate change-driven events likely to be experienced in South Africa and matches them to potential health outcomes for people living in affected areas.
She says actuaries and anyone else fulfilling a risk management function for a South African life and health insurer are encouraged to use the examples provided in the framework as a starting point to identify climate change hazards that pose the most significant risks to the mortality and morbidity experience of their insurance companies.
Once hazards and indicators have been selected for each product type, insurers can begin to assess and quantify the expected impact of these hazards on their mortality and morbidity experience.
Hellig emphasises there is no one-size-fits-all solution for insurers because different risk profiles determine the hazards most likely to impact mortality and morbidity. She adds that last year’s research into the potential impacts of extreme temperatures on the mortality of South African policyholders, for example, highlights that older policyholders are more vulnerable to extreme heat. In contrast, mortality as a result of extreme cold was higher among low-income earners.
The structure of the framework guides users through the steps of a typical risk management control cycle: identification of risks, assessment of potential impacts, management of risks, and ongoing monitoring, and modification of the approach as the risk environment changes, Hellig says.
“The framework aims to guide the gathering and documenting of sufficient evidence to justify climate-change risk assumptions and how insurers apply them. The outcome of this exercise should also guide insurers in the actions they can take now based on the level and nature of risks to which they may be exposed in future.”
