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Implications of climate change for life insurers and pension schemes

The mortality impacts of climate change - part 5 of a 5-part series

Insurance Consulting and Technology|Pensions Corporate Consulting|Retirement
Climate and Resilience Hub|Climate Risk and Resilience|Insurer Solutions

By Keziah Baskerville-Muscutt and Richard Marshall | June 30, 2021

This paper investigates the liability-side impact of climate change. The fifth chapter explores the implications for life insurers and pension schemes.

Climate-change impacts on current liabilities

For life insurers and pension schemes with liabilities stretching over an extended period – often several decades – there is the potential for the long-term impacts of climate change to affect the liability side of the balance sheet in addition to any transitional impacts on asset values.

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About this series

'The mortality impacts of climate change' investigates the liability-side impact of climate change, focusing on the effects on UK life insurers. It considers the mechanisms through which climate can affect mortality, models and quantifies some of those effects and discusses the implications for the life insurance industry.

The modelling described earlier in this series indicates that the ‘pure’ climate effects – those due directly to changes in the trends in the climate drivers themselves, (rather than their economic impacts and their implications for food security and infectious disease incidence) – are small, though potentially borderline-material for deferred pensioner mortality. The changes take place very slowly and the increase in mortality risk due to the marginal change in each driver is also only slight, so the survival of a given cohort of lives only diverges noticeably at very long durations.

However, there is significant uncertainty around these other indirect effects of climate change, particularly in relation to socio-economic adaptations either in attempts to mitigate human impact on climate or in response to climate changes that are now inevitable.

The medium-term implications of climate change for the economy (including the economic costs of transitional interventions and potential productivity benefits of a warmer climate; Day, et al., 2019) could lead to a meaningful change in the extent of funding of health and social care services and therefore to significant variation in mortality experience, particularly for the vulnerable elderly population that relies upon these services. This would include members of many mature, defined benefit pension schemes.

In the longer term, when combined with global population growth, uncertainty around food security, with its potential impact on diet and nutrition and the implied potential for conflict, climate change has the potential to dramatically alter mortality rates. Whilst this might be expected to have a negative impact on mortality, there might be scenarios in which the opposite is true: for example, individuals being forced to change their diets and reduce their total calorie intake or move to a mostly plant-based diet, resulting in a lower level of obesity, a lower rate of diabetes and heart disease, and hence lower overall mortality. As with most risks, insurers and pension scheme managers have to look beyond the superficial implications of climate change in order to identify the potential scenarios in which their experience could be adversely affected.

Protection writers might conclude, at first glance, that this modelling shows that they have nothing to be concerned about over the typical lifetime of a protection product. However, the modelling explicitly excluded the effects of volatility (other than an example of what a single extreme year could do to mortality). Climate change is unlikely to be a smooth progression towards one of the RCP targets, as assumed in our modelling; we will expect to see volatility in each driver year-on-year. If that volatility should increase, then in addition to the modelled trend, we might expect a number of years with particularly high mortality and others with lighter mortality. The modelling also treats the UK as homogeneous, but in reality the effects of air pollution will be particularly concentrated around major urban centres and temperatures may also be higher in these areas. Changes in these factors may affect protection books with a concentration of policyholders or members in urban areas disproportionately, particularly if the aforementioned volatility leads to a year with unusually high temperatures and air pollution in the summer.

Whilst known ‘tropical’ infectious diseases might look unlikely to have a significant impact on mortality, recent experience with COVID-19 suggests that there is still a significant risk from other diseases which may emerge; if climate change and its impact on human activity makes it more likely that these diseases will ‘jump’ to humans, then the potential for further pandemic events will increase.

Even if insurers and pension scheme managers come to the conclusion that the impact on existing liabilities is probably quite small, there is value in demonstrating to stakeholders in the business that a wide range of potential climate-related eventualities have been considered, their impacts estimated and their implications for business planning properly assessed. The ORSA (or an Integrated Risk Management framework for a pension scheme) provides an ideal framework within which to carry out these investigations.

Planning for future impacts on liabilities

Beyond current liabilities, insurers will need to consider how uncertainty around future liabilities as a result of climate change could affect their pricing of long-term policies.

Bulk purchase annuity deals (buy-outs) will be particularly affected because of the impact of climate change on both the asset side (for instance, affecting future default and downgrade assumptions on credit-risky assets) and the liability side. Differing views on future best-estimate climate trends and the potential uncertainty in these may contribute to more competitive or conservative pricing of pension liabilities.

Again, protection providers should not rest on their laurels. Over the term of a protection product, the potential for climate volatility-related deaths and incident disease (setting aside the potential emergence of a further pandemic disease) should at least give insurers cause to consider whether the margins used in their pricing of the risks on term assurance and critical illness products (the latter not considered in our modelling, but still potentially climate-sensitive) are sufficient.

Pension scheme managers should also consider the assumptions used for funding their scheme and reaching their long-term objective. Without considering the impacts of adverse scenarios for future life expectancies arising from climate change on their liabilities or future projections, the scheme risks not achieving its goals or being caught short in years of high mortality volatility. There is considerable value in discussing and debating beliefs on possible future scenarios and how a scheme might prepare for associated outcomes, even if the immediate impact on its existing liabilities is small. This is particularly the case for open pension schemes that have much longer timeframes than the majority of already mature defined benefit pension schemes in the UK.

Whilst historical sustained improvements in mortality range up to around 2.5% a year (2000 to 2011), a lower bound for sustained improvements is hard to assess. Given the potential for significant indirect health impacts from climate change, periods of stagnant or even worsening mortality are possible in extreme scenarios. However, such scenarios would likely lead to some form of public health interventions in response, mitigating the impact and also increasing the difficulty of quantifying how ‘adverse’ a result could be. It is clear, though, that the potential range of life expectancies, when taking into account indirect effects, is materially broader than our driver-based modelling, which considers only direct effects, would suggest.

Areas for future research and the potential role of the actuarial community

There is clearly a lot of work still to be done to properly understand the likely impact of climate change on life insurance and pension scheme liabilities, in particular around when sentiment about the course of future mortality may change, and there are opportunities for actuaries to get involved in work on this and other aspects of the potential effects of climate change on the insurance industry, pension schemes and public sector finances.

At the time of writing, the Institute and Faculty of Actuaries has set up a working party focusing on identifying potential research within areas of Health and Care to which climate change might be relevant, supplementing work already carried out in the context of life insurance. They have also published a series of ‘Practical Guides’ on climate change, specific for different practice areas. We expect that, over time, further working parties are likely to be set up across broad practice areas including pensions, life and health insurance, general insurance, sustainability and investments, as the importance of climate change as a risk to insurers, pension schemes and the broader financial sector becomes clearer.

The bigger picture

As has been mentioned above, climate change affects not only the liabilities of life insurers and pension schemes, but the value of assets in which they might invest in order to match those liabilities and optimise their combination of capital and expected returns. General insurance liabilities may also be affected. It would be inappropriate to consider life insurance and pension scheme liabilities in isolation.

We believe that insurers and pension schemes need to have a holistic view of their exposure to the effects of climate change from both a best-estimate and risk perspective.

The issue of climate change is one that we ignore at our own peril.”

Former US President, Barack Obama (2006)


Day, E. et al., 2019 Upholding labour productivity under climate change: an assessment of adaptation options. Climate policy, 19(3), pp. 367-385.
Obama, B. 2006 Energy Independent and the Safety of Our Planet. [Online]. Available at:


Keziah Baskerville-Muscutt
Risk Associate, Insurance Consulting and Technology

Keziah Baskerville-Muscutt is a Risk Associate in Willis Towers Watson’s Insurance Consulting and Technology business and graduated from Durham University with a degree in Physical Geography and MSc in Risk (Climate & Environmental).


Richard Marshall is a Director in Willis Towers Watson’s Insurance Consulting and Technology business and leads the development of mortality and demographic risk models for our UK business.

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