Climate Change: An Actuarial Perspective

 
Written by Maryann Taylor 

 

In a panel moderated by Lewis Hassett of Morris, Manning & Martin, attendees heard from two esteemed actuarial experts on climate change and the impacts on the property and casualty industry.  The panel was comprised of Michael Angelina, ACAS, MAAA, CERA, the Executive Director of the Academy of Risk Management and Insurance at Saint Joseph’s University and Steve Kolk, ACAS, MAAA , an independent consulting actuary and active member of the Climate Index Work Group.

 

The session began with Professor Angelina explaining the origins and goals of the Actuaries’ Climate Index (“ACI”) and the Actuaries’ Climate Risk Index (“ACRI”), both of which were commissioned and sponsored by four major actuarial groups: the American Academy of Actuaries, the Canadian Institute of Actuaries, the Casualty Actuarial Society and the Society of Actuaries.  The goal was to create objective and straightforward indices from an actuarial perspective and to use those indices to inform the insurance industry and the general public on the impact of climate change and contribute constructively to the climate change debate.  The end result was the creation of one index that measures changes in climate extremes – the ACI. It will soon be followed by a second index that relates those climate extremes to economic and human losses – the ACRI. 

 

The ACI focus on the frequency of severe weather based upon historical data of six variables consisting of high temperature, low temperature, heavy precipitation, lengthy drought, high wind and coastal sea level.  Indices of the six climate variables are calculated based on separate formulas from data derived from different sources.  The data is then constructed for geographic grids, then summarized to regions, countries, and in total.  The ACI Index is a composite of six underlying indices.   The ACI shows that the frequency of extreme weather has increased with more frequent heat, rain and drought and less frequent cold extremes.  Incidents of extreme weather has dramatically increased over the last decade.

 

Unlike the ACI, the ACRI will adjust for exposure and is based on the historical correlations of economic losses, mortality, and morbidity to monthly ACI data by region.  In other words, the ACRI correlates to property damage losses and to injuries to people.  For the USA and Canada, the ACRI has been above its average reference period value (which is set to 5) about 96% of the time since 2005.  Heat has been the primary driver of the index, although drought and flood have also been high at times.

 

Panel member Steve Kolk presented on the impact of climate change on insurance risk and the global community, delving first into an explanation of the science, the historical discourse and the genesis of the Climate Change Committee.  Measuring climate change requires an understanding of how the climate system operates, which encompasses the entirety of the atmosphere, land surface and oceans over a wide range of time.  Changes are occurring, on both a regional and global scale that exceed what is to be expected from natural climate variability alone.  Surface temperatures have risen and sea levels are rising.  The implications of the wide-ranging and rapid changes in climate for human populations and economic assets are an object of deep concern.  The ACI should be thought of as the footings of a new analytical home and the ACRI as the solid foundation of new handles on climate risk.  Future ACRI projects will inform risk analytics enabling society to stand firm amidst climate magnified risks.   

 

The ACI and ACRI information will be publicly available on a new website, as a resource for use in further research (www.actuariesclimateindex.org) and (www.indiceclimatiqueactuaries.org).