Actuaries Climate Index

Last Updated 9/29/17

Issue: The Actuaries Climate Index (ACI) measures the frequency of extreme climate events over recent decades for the U.S., Canada and 12 sub regions in North America. It is a composite of six underlying components: 1) frequency of temperatures above the 90th percentile; 2) frequency of temperatures below the 10th percentile; 3) maximum 5-day rainfall in the month; 4) consecutive dry days; 5) winds above the 90th percentile; and, 6) sea level. The components measure extremes because extremes have the largest impact on people and property.

The ACI has been 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 educational resource for the insurance industry and the general public on the impact of climate change. Actuaries may use it in developing predictive models for potential climate change related losses or opportunities and for risk management strategies.

Overview: To remain solvent, insurers must be able to sufficiently price, pool and spread risk. However, changing climate characteristics bring increasing variability into modeled losses. This makes it harder for insurers to identify their tail risk—that is, the risk severe catastrophic losses could impair solvency. Insurers need to look at the frequency of severe weather to accurately assess if there is an increasing incidence and risk of weather extremes. However, most climate data is published as averages over time, which is not useful to insurance actuaries.

To address this, the four North American actuarial bodies began collaborating on research aimed at assessing climate change and its potential risk implications to the insurance industry. As part of this effort, the research paper Determining the Impact of Climate Change on Insurance Risk and the Global Community was released in 2012. The paper laid the framework for the development of the soon-to-be-released Actuaries Climate Index (ACI) and the Actuaries Climate Risk Index (ACRI). The ACI measures changes in climate extremes, while the ACRI relates those climate extremes to economic and human losses.

The ACI is designed to be an objective, easy to understand (but not overly simplistic) educational tool on climate change and its related risks. It focuses on measuring frequency and intensity of extremes rather than averages. The ACI can be used to monitor long-term climate trends or compare trends against other sources of climate data. Actuaries might utilize the data, measures of the individual components and index in evaluating the potential risks of climate related changes to their buisness. For instance, a high index for drought could indicate increased potential for wildfire risk and resulting property damage.

Status:The ACI was released November 30, 2016. The index is hosted on public websites where users can find a variety of graphics showing changes in the ACI, its components and their regional distribution. There are many ways the data elements can be combined into a composite ACI and the web interface provides the user with certain calculation options. However, the default will be a simple mean of the components. The website can be found at www.actuariesclimateindex.org.