Two years ago the Actuaries Climate Index was launched to demonstrate how extreme weather events are on the rise in the United States and Canada.
Now the developers of the index want to see if more extreme weather means more costly insurance losses by creating an Actuaries Climate Risk Index. It is scheduled for launch in 2018.
CAS Fellow Doug Collins explained how the risk index would work at the session “The Actuaries Climate (and Climate Risk) Indices: Uses for Modeling,” held during the CAS Annual Meeting in Anaheim, California. He gave an overview of the current index and a guided tour of the host site for the index, actuariesclimateindex.org.
Development of the indices is a joint venture of the CAS, the American Academy of Actuaries, the Canadian Institute of Actuaries and the Society of Actuaries. The indices are intended to show objectively the changes in climate extremes and the associated financial and human impact. The indices are there as a means for the actuarial profession to add objective information to the public policy debate over climate change.
However, Collins said, “We do not try to address the causes of climate change . . . The emphasis is on keeping it an objective measure of the past.”
The original index, the Actuaries Climate Index, has been fairly successful. Its website has recorded more than 22,000 visits from 134 countries. Its data has been downloaded more than 1,600 times. Six hundred people have signed up to receive updates.
The index has reported the frequency of severe events quarterly since November 2016. It divides the United States and Canada into 12 subregions.
The index looks at extremes in six different climatic elements:
- high temperatures.
- low temperatures.
- sea level.
The index operates somewhat like the consumer price index, Collins said. There is a measurement in each region for each climatic element, plus a composite of each of the elements. And there is a set of readings for the U.S. and Canada combined.
All of the readings are calibrated to the 30-year period from 1961 to 1990. The 1961-90 baseline was selected because climate scientists prefer to look at eras in 30-year increments, Collins said, and earlier data was too sporadic and not reliable enough.
The average reading across that span is defined to be 1.00. A reading above 1.00 means there were more extreme events than were typical in that era; a reading under 1.00 indicates there were fewer extreme events.
In announcing results, press releases about the index emphasize the five-year moving average of results, which smooths out fluctuations in the reading.
The October 2017 press release announced results for the 2016-17 winter. That reading, 1.14, set a record. Results were driven by more warm days, fewer cold ones, more heavy precipitation and higher sea levels, Collins said.
Collins then outlined the steps in developing the Actuaries Climate Risk Index, which would show how extreme events are correlated with economic and human losses. The risk index will bring in data from Spatial Hazard Events and Losses Database for the United States (SHELDUS), a project out of the University of South Carolina that has county-level information on economic losses from extreme events.
Analysts looked for significant relationships between extreme events as defined by their index and economic losses from SHELDUS. Some findings were intuitive. Extreme heat was correlated with deaths from heat. Flooding was correlated with heavy rain. Wildfire was correlated with heat. From all that work, an index from 1 to 10 was created, with 5 as the average from a reference period.
Preliminary work, which ended with readings in 2014, showed that the heat component was the biggest driver of the index, Collins said. And heat, he said, is what had been driving the index higher than its normal baseline. In the United States, it is important to note that the later periods tended to be above average in extreme-weather-related losses, but not by much. Canadian measurements, on the other hand, stuck close to the long-term average.
The next step for the new risk index is a peer review by The Research Committee of the U.K.’s Institute and Faculty of Actuaries. When it passes peer review, the index will be updated and launched, likely in 2018.
James P. Lynch, FCAS, is chief actuary and director of research for the Insurance Information Institute. He serves on the CAS Board of Directors.