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"Global warming will lead to increasing weather volatility" - Interview with Dr. Bernd Hirschfeld

Dr Bernd Hirschfeld is head of the validation unit within the Actuarial Function at Generali Deutschland AG. Previously, he was Senior Manager at KPMG for several years with focus on risk management. Dr Hirschfeld is a DAV actuary and is involved as a member of the two working groups ORSA and Tasks of the RMF and Climate Change - Actuarial Implications in Non-Life Insurance. Dr Hirschfeld is also head of the Sustainability Coordination Group, which bundles the DAV's work on sustainability and climate change.
Written on 06/08/22

Sustainability is gaining more and more importance at national but, above all, at European level. With the inauguration of the new EU Commission, the goal of developing Europe into the first climate-neutral continent by 2050 ("European Green Deal") was confirmed. To achieve this goal, multi-layered packages of measures have been proposed. These include, among others, the "Action Plan: Financing Sustainable Growth", which aims to strengthen sustainability aspects in many areas of the finance and insurance industry. 

What climate impacts could be expected if the current legal framework continues as it is and no adjustments are made?

Indeed there is a huge gap between the globally binding Paris Agreement (keep the rise in mean global temperature to well below 2 °C; preferably limit the increase to 1.5 °C) and the current legal framework. The scientific projections with the “current policies” assumption fall into the category called “hot house world”. They show that annual global CO2 emissions would roughly stay at the same level for at least the next thirty years. Consequently, the global mean temperature increase would definitely reach 2 to 2.5 °C by the year 2060 and thus probably trigger tipping points (such as the thawing of permafrost). Practically speaking, this would lead to increasing weather volatility in Europe, too – with more frequent and more severe heavy rain and flooding events, heat waves and water shortages. To be honest: The “current policies” scenario is a horrendous scenario for all people who will live in the 2060s and beyond.

On the occasion of the industry-wide discussions of climate change, the DAV would like to set up a new working group on climate scenarios. What exactly are the plans of this working group?

The working group will try to find a solution for the very true statement “History is no longer representative for the future”. If we look, for example, at modelling the implications of the physical climate change effects for the insurance industry, we need to bridge from climate projections to claims projections. The published results of climate projections consist mainly of variables such as global annual mean temperature or amounts of precipitation, sometimes also percentiles thereof. However, these cannot be used to model natural catastrophe events that happen within hours or days. Therefore we will reach out for dialog with climate scientists in order to close this gap. This is equally true for health and life insurance where implications for mortality and morbidity tables are needed. And I haven’t mentioned the economic implications of decarbonisation yet. All these topics must be handled in consistent scenarios. So it’s definitely a tough program that lies ahead.

Within the DAV, you are dealing with climate change and its effects in various working groups. Sustainable investments are becoming increasingly important. What exactly does this mean for the finance and insurance industry and especially for the actuarial profession?

Within the world of an emerging climate crisis, investments are facing multiple threats. First, there are the physical effects as mentioned before. Even if physical damage to production sites is insured, a site exposed to the physical effects of climate change might cease to be profitable. Then there is decarbonisation, i.e., the transformation from fossil-based production and life to fossil-free ones. The progress of this transformation depends significantly on political action, i.e., it is hard to foresee. Therefore it is important to distinguish between assets and business models that are based on fossil fuels and those that aren’t – sustainable ones.

Do you think that actuaries are aware of the importance of climate change and the resulting changes for their work?

Actuaries are becoming more and more aware of the importance of the climate crisis. However, most of them still underestimate the implications for everyday actuarial work. The energy industry or the investment sector has much ahead. There is hardly any actuarial task that is not affected by the climate crisis. The Sustainability Coordination Group is trying to address this by increasing awareness by means of publications and promoting education activities.