An actuarial climate index that will measure weather extremes will be launched within the next few months, actuaries were told at the 2015 CAS Spring Meeting in Colorado Springs in May.
The index will help to combine a practical actuarial need to account for climatological trends in models with a public need to show what effect long-term climate changes have on extreme weather, said Stuart Mathewson, FCAS, a member of the CAS Climate Change Committee.
“We would really like people to understand the difference between weather and climate,” Mathewson told about 150 attendees in a session titled “Climate Change: What Can We Do About It?”
The Actuaries Climate Index (ACI), a joint effort between the CAS, the American Academy of Actuaries, the Canadian Institute of Actuaries and the Society of Actuaries, will measure the frequency of extreme events in order to educate the public about climate change. Insurance claims are often driven by extreme events: hurricane-force winds, torrential rains and soaring temperatures, to name a few. The index is an educational tool that could help pricing actuaries incorporate long-term trends into their mathematical models; it could also help actuaries and others working in enterprise risk management by quantifying the risk as a subtle, long-term trend.
The index is an example of casualty actuaries using their quantitative skills to tackle a difficult problem, said CAS Climate Change Committee Chair Doug Collins, the program moderator.
“I like to think of actuaries as the scientists of the insurance industry,” Collins said.
The index could ultimately be an example of “usable science,” said panelist Lisa Dilling, an assistant professor of environmental studies at the University of Colorado-Boulder. Usable science is a term that refers to scientific information being generated by a deliberate process so that it can be understood and used by decision makers more effectively. The key, she said, will be to adapt the index to help decision makers understand what is being measured and how to use it effectively.
The first version of the ACI will cover the United States and Canada, splitting the nations into 12 zones, each of which will have its own set of indices, Mathewson said. Measurements will be taken by grid, with each grid approximately 170 square miles.
The index will have six components: high temperatures, low temperatures, heavy precipitations, lengthy drought, high winds and elevated sea levels.
Each quarter, the ACI will measure how many extreme events occurred in each zone, with extreme defined as being in the highest 10 percent or the lowest 10 percent of events across a baseline period of 1961 to 1990.
The six components will be combined into one ACI for each region, and those will be rolled up into a single number for all of North America.
The ACI will be rolled out after the launch of a website to host the data a few months from now. So far the index, working from historical data, has shown that extreme weather has become more frequent. T90, the index for hot days, has been growing since the mid-1980s. The cold-day index, T10, has been declining. In other words, while we have seen an increase in notably hot days, we are experiencing fewer notably cold days.
The overall ACI took a big jump in the 1990s, Mathewson said, though the last few years show a leveling off.
Work on the index started within the CAS Climate Change Committee. Property-casualty is the branch of insurance most obviously affected by climate extremes, Mathewson said.
Some extreme events, particularly heat and cold, can affect mortality and health. So the CAS joined with other North American actuarial associations to create a Climate Index Working Group, Mathewson said.
That group worked with a private company, Solterra Solutions, to develop the index. The index will be calculated on quarterly basis. Members of the Climate Index Working Group will develop commentary to explain each quarter’s activity.
Right now the index will only monitor North America, but there are discussions with the actuaries in the United Kingdom to expand. The working group is also reaching out to other actuarial organizations worldwide.
In addition, the group is developing a separate Actuaries Climate Risk Index that combines the effects of extreme weather with the effects of changing exposures. The second index will aim to capture more precisely the insurance risk within extreme weather. If more people move into a vulnerable area, for example, the insurance industry is more likely to be exposed to an event.
James P. Lynch, FCAS, is chief actuary and director of research and information services for the Insurance Information Institute in New York.
