April 1, 2017 by Caterina Lindman, Chair, Climate Index Working Group; and Doug Collins Chair, Climate Change Committee
The latest batch of data from the Actuaries Climate Index (ACI) – developed collaboratively by the Canadian Institute of Actuaries, the Society of Actuaries, the Casualty Actuarial Society and the American Academy of Actuaries, with climate expertise and research provided by Solterra Solutions – was released in March.
Tracking quarterly changes in climate extremes and sea level, the index shows that a number of Canadian regions are among the areas with the highest index values. Higher values signify the largest deviations in extreme weather events and sea levels from historical values.
Using data from neutral, scientific sources, the frequency of extreme events measured by the index is relative to the average frequencies during the 1961 to 1990 reference period.
Are the findings cause for concern about climate change? How should insurers and others deal with the changes?
WHAT DO THE RESULTS SHOW?
The latest index values for Canada point to an increase in the frequency of extreme weather occurrences and changes in sea levels to a sustained index value well above any five-year period during the reference period (see graph opposite).
The analysis of data for Canada shows the current five-year moving average value for the index is 0.67. The index value averaged zero during the reference period (by definition), first reached a five-year average value of 0.5 in 2006, and has stayed consistently above that level since 2010.
As noted, these values indicate an increase in the frequency of extreme weather occurrences and changes in sea levels.
Looking at the United States and Canada combined, three of the past four seasons have witnessed an index value in excess of 1.50, compared to the 30-year reference period.
The spring and summer 2016 data reflect a continued pattern of increased frequencies of high temperatures and precipitation, and of lower-temperature extremes compared to the reference period.
The index divides the continental United States and Canada into 12 regions. Specifically, Canada is divided into five regions.
The current highest five-year average values by region are in the Northwest Pacific, Northeast Atlantic and Southern Plains (Kansas, Montana, North Dakota, Nebraska, Oklahoma, South Dakota, Texas and Wyoming).
Where possible, the index components measure extremes, rather than averages, because extremes have the largest impact on people and property. Averages tell a story, but with climate data, important trends are better revealed by looking at what is happening at the extremes.
The ACI has six components, namely the following:
These components were selected because they are representative of the key impacts of climate on people and the economy.
Looking at the data for Canada by component, heavy precipitation has seen the largest changes in recent years, followed by the increase in warm temperatures and a corresponding decrease in cold temperatures. The latter component is subtracted from the other five when calculating the composite index.
By subtracting this component in the index calculation, the index is increased by the reduction in cold extremes, consistent with increased melting of permafrost and increased propagation of diseases, pests and insects that were previously less likely to survive in lower temperatures, the index explains.
HOW CAN THE INFORMATION BE USED?
Canadian insurance companies can use data by region and component to focus on areas where claim activity is most important. Concerned about heavy rain in Ontario and Quebec? Data for the northeast forest region will show that periods of heavy precipitation have been more significant in recent years, causing that component to be the leading index value for the latest five years at 1.26.
Underlying that index change is a 12% increase in five-day, monthly maximum precipitation in the latest five years compared to the reference period.
Seasonal data underlying graphs could be modelled against claims data to help assess the risk and, in turn, companies can incorporate their insights into specific pricing, underwriting, product development or claims strategies.
POTENTIAL EFFECTS IF THE PATTERNS CONTINUE
Climate change will have varying effects by class of business; property, casualty, life and health insurers will identify different risks and opportunities. Reinsurers will be interested to know how their reinsureds are monitoring this aspect of their business. Specifics about the frequency of extreme events should also be useful to non-insurers in their financial planning and risk management efforts.
Coverage decisions, such as where and whether or not to provide property or flood insurance, can be informed by historical climate statistics.
Actuaries are increasingly using predictive models to measure correlations and trends for use in pricing, underwriting, claims management, marketing and enterprise risk management.
The risk management implications of climate change will only continue to grow if current trends continue. Companies that incorporate climate data into their strategic planning will have a competitive edge.
They will also be better able to provide climate disclosures and supply convincing information to regulators, shareholders and lenders to demonstrate that they are effectively managing risks.
Caterina Lindman, Chair, Climate Index Working Group; and Doug Collins Chair, Climate Change Committee