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Climate change made headlines this week as a key government decision sparked renewed debates among politicians. It’s a topic that has also sparked serious discussion within the insurance industry and actuaries are being asked to evaluate the potentially serious implications. Our previous blog post examines how climate change could impact the insurance industry and discusses what actuaries are doing to provide unbiased tools to analyze climate data. The Actuaries Climate Index (ACI) measures the changes in climate over time in a single index score. Scores greater than 0 indicate a greater than average frequency of extreme weather such as high temperatures and rising sea levels. The ACI provides a wealth of information from which we can gain key insights into the behavior and impact of climate change that has already been observed:
The climate is changing. The above graph shows that from 1961 through 1994, the climate was steady, with periods of above-average (red bars) outcomes followed by below-average (blue bars) outcomes. Starting in 1994, a trend toward more extreme weather has emerged, with above-average data points becoming the norm. In fact, the latest five data points (through summer 2016) are all greater than one standard deviation above normal.
Climate means long-term change. Although the ACI has been marching upward, there is one recent “blue bar” occurring in winter 2014. It’s the only data point below zero in the ACI since 2003. I remember that winter well. Many areas of the United States were experiencing brutal temperatures. Here in Chicago, it was one of the coldest winters I’ve encountered. In a seemingly endless freeze, it was not difficult for many to question whether the Earth was warming. It’s important, however, to remember that you can’t gauge the effects of climate change by looking at the seven-day forecast. Climate is measured as a trend in weather over a long period of time. In relation to the trend, winter 2014 is simply an outlier. The ACI accounts for this by showing a five-year rolling average (the black line) which indicates the impacts of climate change have been steadily increasing.
Climate change isn’t impacting all regions equally. The ACI can be reviewed at a regional level within North America. Climate change is not impacting all regions to the same degree. For example, the Northern Plains has no discernible trend while the Southern Plains, on the other hand, has felt a much greater impact. Climate change is a global phenomenon, but its effects vary greatly by region. Actuaries should keep in mind that the impact to their book of business may be highly dependent on location.
Not all weather events are becoming more extreme. The ACI can also be reviewed separately by component (Warm Temperature, Cool Temperature, Extreme Precipitation, Consecutive Dry Days, Extreme Wind and Sea Level). For example, sea levels are rising but extreme wind has no discernible trend. Actuaries should note that climate change may impact various hazards to differing degrees.
The insurance industry is keeping a close eye on the climate change threat. The ACI is a valuable tool to track the impact on extreme weather events. I encourage everyone to subscribe to the index for news as it is updated with the most recent data and new tools.
Zach Brogadir is a Consulting Actuary with Pinnacle Actuarial Resources, Inc. in the Chicago, Illinois, office and has over seven years of experience in the property/casualty industry. He has considerable experience with the analysis of unpaid claim liabilities, ratemaking/funding indications and predictive analytics for a variety of personal and commercial lines of business. Zach is a Fellow of the Casualty Actuarial Society (CAS) and a Member of the American Academy of Actuaries (MAAA). He serves on the CAS Examination Committee and is the President of the Midwest Actuarial Forum.
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Pinnacle is an actuarial firm focused on property/casualty insurance, including alternative markets, captives, self insureds, enterprise risk management, predictive analytics, commercial lines and more. We serve trucking, insurance, health care, medical professional liability, reinsurance, workers compensation, public entities and other companies and concerns.
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