PhD Project: The impact of climate change in pricing and reserve in a competitive insurance market

March 29th, 2018

Climate change is an important underlying risk factor that might have an impact on the insurance industry, pension funds, the financial sector (as a significant proportion of the financial markets is driven by pension funds) governmental agencies, and decision and policy makers. In the insurance industry, strong market competition has boosted the demand for a competitive premium, where competition drives premiums down. The insurance premium has a substantial impact on the actuarial reserving calculations and on the implementations by the regulatory authorities.

In this project, we have the following objectives. First, we want to identify and categorize the major risk segments for life and non-life insurers, and understand the way these risk segments are affected by climate change. Following this, the impact of uncertainty on the various parameters involved in the applied model will be examined. Secondly, we will model premium dynamics via differential games, and study the insurers’ equilibrium premium dynamics in a competitive market. In this regard, not only will different tools from optimal control, mathematical programming and economic theory be applied to determine the equilibrium premium strategies, but also, we will consider different market conditions. Finally, we will check which of the parameters involved in the model are most sensitive for climate change, focusing on how uncertainty in these parameters may impact on insurance equilibrium pricing and reserving. Additionally, we will demonstrate the impact of these projections on various financial calculations, and will provide a number of ways of quantifying, both graphically and numerically, the model risk in such calculations.

For the purpose of our study, data from the Australian and EU insurance markets will be considered. We focus on temperature changes as our proxy to climate change, while extensions can be obtained by including other important climate change factors such as (lack of) rainfall. A large number of simulation case studies will be conducted. In particular, an objective of our study is to quantify the sensitivity of the profit of the insurers towards the uncertainty of the long-term trend of climate change.