Actuaries Adapt to Climate Change Using New Tools
Pinnacle, June 2017
Insurance Industry Initiatives to Collaborate and Partner for Catastrophe Resiliency
CIPR Newsletter, November 2016
Climate Change Risk Disclosure Initiatives
October 2013, CIPR Newsletter
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Senior Researcher, CIPR
Last Updated 12/01/17
Issue: The Actuaries Climate Risk Index (ACRI) illustrates the economic impact of climate risk and its evolution over time. It does this by integrating information about perils, exposures and susceptibility of exposures to harm by peril into the Actuaries Climate Index (ACI). The ACI measures changes in climate extremes, while the ACRI relates those climate extremes to economic and human losses. The ACRI is being developed in partnership by the American Academy of Actuaries (AAA), the Casualty Actuarial Society (CAS), the Canadian Institute of Actuaries (CIA) and the Society of Actuaries (SOA). It is intended to be an especially useful tool for the insurance industry. Actuaries could use the ACRI and its components to create predictive models of climate related losses and opportunities and to evaluate potential risks.
Overview: There are a number of risk perceptions related to the potential impact of climate change. Insurers need to be able to accurately and objectively assess and quantify the validity of these perceptions for proper risk management. However, actuaries lack climate data focusing on the frequency (rather than average) of severe weather to quantify the true incidence and impact of weather extremes. To address this, the four North American actuarial bodies began collaborating to develop the soon-to-be-released Actuaries Climate Index (ACI) and Actuaries Climate Risk Index (ACRI). The ACI focuses on measuring frequency and intensity of extremes rather than averages. It is a composite of six underlying indicators: high and low temperature, heavy precipitation, lengthy drought, strong winds and coastal sea level. The ACI is combined with vulnerability and exposure measures (population and property values) by product line or region to produce the ACRI. The ACRI uses the same time period as the ACI.
The ACRI is intended to aid the insurance industry in modeling for potential climate change related losses. It’s designed to assess what population and property are at risk of climate change related losses and quantify this risk. As such, the ACRI can be used by actuaries to assist them in quantifying climate change impacts on specific books of business. The regional and line of business ACRI can also be used for portfolio diversification decisions. The ACRI could be used as an actuarial pricing tool since it better reflects changes in long-term trends than trended historical data. The ACRI’s incorporation of hazard climate sensitivity makes it a useful tool in calculating the climate change “uncertainty or ambiguity” load in pricing and capital management. Additionally, like the ACI, components of the ACRI could be deconstructed, modified or substituted for independent components reflecting individual user preferences. Future research in this area is likely to fine tune the ACRI calculation to be of event more use to the insurance industry by using insurance losses instead of economic losses or incorporating insurance claims.
Status: The four North American partnering actuarial associations anticipate the ACRI to released by the first quarter of 2018. It will be hosted on the same public website as the ACI and will include commentary in French and English. The website will also host documentation, index component charts, regional maps, index data for download and links to other information. Once the website is expanded to include the ACRI, both the ACRI and ACI are anticipated to be updated at the same time quarterly. The updates will be announced through news releases with commentary. The host website for the ACI and soon-to-be released ACRI can be found at www.actuariesclimateindex.org.
Collins, D., Lindman, C., and Manghnani, V. (2014, April 1). Actuaries Climate Index. Presentation presented at 30th International Congress of Actuaries, Washington D.C. Retrieved from http://www.actuaries.org/COUNCIL/Documents/Vancouver_LindmanPresentation.pdf
Angelina, M. (2016, April 12). Actuaries Climate (Risk) Index. Presentation presented at RIMS Annual Conference 2016 in California, San Diego. Retrieved from www.rims.org/Session%20Handouts/RIMS%2016/EMR002/EMR002%20Environmental.pdf