2023 Australasian Actuarial Education and Research Symposium

Eugenia Fang

University of New South Wales

Understanding compound weather and climate events through the lens of systemic financial crises

Climate change has emerged as one of the greatest global challenges of our time. One of the most concerning risks of climate change is the potential for compound events (CEs) to increase, where multiple climate drivers and/or hazards interact with each other in a complex manner, leading to amplified impacts on the physical environment, human systems, and ecosystems. To achieve a quantitative understanding of CEs, we develop a modeling framework that comprises climate drivers, hazard events, and damages and addresses the stochastic nature of CEs. Motivated by recent studies on complex financial networks and the long-standing concept of systemic risk, we liken CEs to systemic crises in complex financial networks. Despite apparent differences between the two concepts, CEs, and financial crises share strong similarities. CEs are influenced by climate change, which, in turn, is caused by carbon emissions. Similarly, financial crises are driven by factors like excessive risk-taking, macroeconomic imbalances, and regulatory failures, all of which can be traced back to human greed. Therefore, some of their similarities may be attributed to their common anthropogenic nature. The fully stochastic and dynamic nature of our modeling framework makes it feasible to accommodate some important features of CEs, such as spatio-temporal dependencies, causal chains, feedback loops, tipping points, nonlinearity, and deep uncertainty.