Mental Arithmetic

Recently, I’ve had to twice do something I generally try to avoid – mental arithmetic. (Mathematics, in which I have a Masters degree, didn’t make any sense to me until it started being more about letters than numbers, but that’s another story.)

The first occasion was trying to work out whether I would be caught by the increase in retirement age to 70 by 2035. Normally I don’t bother about working these kinds of things out as I assume I’m young so everything will affect me. Having just hit my 40th birthday, I can no longer rely on this assumption, and after much head scrunching, it was clear that I was still not old enough to have the grey lobbyists on my side.

The second occasion was at the recent 2014 Catastrophe Risk Seminar – possibly one of the best Actuaries Institute events I’ve attended. One by one the excellent presenters unpacked the cat models, and brilliantly explained how they worked, how to use them in practice, and more importantly how not to use them. Collectively, they gave wise counsel on how we as actuaries can help boards and management of insurers improve their understanding and use of cat models. They described the latest innovations and prospects for improving the models and reducing their prediction uncertainty.

Source: Antartic Climate and Ecosystems CRC Sea Level score card 2012

One of the largest uncertainties is of course the impact of climate change – something emphasised by Lloyd’s of London, who on the same day as the seminar released their report on Catastrophe Modelling and Climate Change. This report sets out the evidence of climate change in the global catastrophe experience over recent decades, and prompts insurers to include such trends in their cat modelling.

Also outside the seminar, the US surprisingly announced that carbon emissions from their power plants would reduce by 30% from 2005 levels by 2030. Just like POTUS, the Australian public also seems to have become more concerned about climate change, according to a Sydney Morning Herald survey.

Back at the seminar, Andy Pitman of the UNSW Climate Change Research Centre gave a comprehensive presentation on the impacts of climate change on different natural perils, the state of the science, and the uncertainties – the greatest of which is actually future carbon emission levels. Professor Pitman pointed out that the overall global impact of warming was basic thermodynamics, but the science is less clear about prediction at a city level. In the figure below you can see the best estimates we have of the increase in frequency of flooding events under a sea level rise of half a metre. Is there even enough capital in the world to provide APRA’s mandated 1 in 200 year event cover if claim frequency increases a thousand fold?

In Sydney we can expect that a 1 in 100 year flooding event will happen almost every month. If we continue to have high emissions, we’ll get that half a metre sea level rise by 2070. I didn’t bother working out how old I’d be then.

I worked out that my six month old baby son would be 57.

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