An Overview of the Actuaries Climate Index

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In this article, David Hudson from the Institute's Climate Change Working Group reviews the recent release of the Actuaries Climate Index (ACI) by American and Canadian actuaries, highlighting its uses and feasibility for UK, Europe and Australia.

On November 30, 2016 the Actuaries Climate Index (ACI) was launched by organisations representing the actuarial profession in the USA and Canada.

The Index measures changes in the frequency of extreme weather, compared to the period from 1961 to 1990. 

It is intended as an "objective measure of observed changes in extreme weather and sea levels" and "to provide a useful monitoring tool of climate trends...updated quarterly as data for each meteorological season becomes available", according to the ACI's webpage.

Five measures of extreme weather and sea level changes are linearly combined into a single index, the ACI.

The ACI is calculated using a five yearly rolling average.

  • ACI = mean (T90std - T10std + Pstd + Dstd + Wstd + Sstd)
  • T90 – number of days with temperature above the 90th percentile
  • T10 – number of days with temperature below the 10th percentile
  • P – maximum rainfall per month in 5 consecutive days
  • D – Annual maximum consecutive dry days
  • W – Frequency of wind speed above the 90th percentile
  • S – sea level changes

The measurement of observed extremes was chosen as these events constitute the greater impact on mortality, health and the economy. The control period is from 1961 to 1990 where the average ACI was 0 and it never deviated more than ±0.3. There are 12 sub regions across Canada and the United States (not including Hawaii) where data is grouped. The Central Arctic and Midwest region have no sea level component so the other 5 statistical anomalies are averaged.

the actuaries climate index for the us and canada

Above is the combined ACI up to the present. As for any normal distribution, a value greater than ±1 would be seen as unusual while a value of ±2 would be seen as very rare. The last 5 year rolling average reading was above 1 with the last three quarterly readings being 1.3, 2.16 and 1.46.

What are its potential uses?

The Actuaries Climate Index™ could be of great use to the risk transfer industry, providing the industry and its participants with a new set of data related to the increased frequency of extreme weather events..”                                                                                                                           

ARTEMIS on JANUARY 25, 2017

The ACI is a free tool which can be used when measuring the severity and regional variety of changes in insurance and investment needed because of the rapidly changing environment.

The data collected for components of the index were recently used in the Aon 2016 Annual Global Catastrophe report. This report contained conclusions that the probability of a catastrophic weather event occurring in any given month and the probability of billion dollar weather events have both roughly tripled since the end of the control period of the ACI.

The ACI may be used in France to provide one of the data references used by actuaries, auditors and CFO’s of Publicly Listed Companies in their mandatory carbon reporting (Article 173).

“The Actuaries Climate Index™ (ACI) is intended to provide a useful monitoring tool—a “Climate at a Glance” indicator”

http://actuariesclimateindex.org

Feasibility for Australia

an extension (for the UK/Europe) would be technically feasible, and that no changes to the formulation of the index would be required; the main challenge would be that of selecting the optimal datasets...”

www.actuaries.org.uk

The Institute and Faculty of Actuaries has commissioned a feasibility study into the adoption of an ACI for the UK and Europe. The results of the study were positive with an identified problem being the strength of the data across Europe. The study concluded that a UK/Europe ACI would be as robust as the US/Canada ACI if the data collection was restricted to areas with a sufficient density of weather stations.

The following table is from the Australian Bureau of Meteorology website. An initial review of the number and location of weather stations and the data collected by these leads me to believe there are unlikely to be such barriers to finding robust data sets in Australia.

aus climate variability

http://www.bom.gov.au/climate/change

Conclusion

The ACI is very new and there have been minimal examples of the data being used in the industry as yet, however, the relative ease at which this index could be applied means there is little reason not to transfer the ACI to our region. In fact, a similar study based on extremes of rainfall, temperature and soil moisture content was produced in a paper by Ailie J. E. Gallant and David J. Karoly at the University of Melbourne in 2010. Finally, it will be easier to reproduce the ACRI (Actuaries Climate Risk Index) which is looking to quantify the cost of extreme weather events, if there is already the data set collected for the ACI.

References

Sites:

Papers:

Articles:

  • PRNewswire “Actuaries Climate Index Launched Today Measures Changes in Extreme Weather Events and Sea Level”   http://www.prnewswire.com/news-releases/actuaries-climate-index-launched-today-measures-changes-in-extreme-weather-events-and-sea-level-300370075.htmlNational Association of Insurance Commmissioners “Actuaries Climate Index”
  • http://www.naic.org/cipr_topics/topic_actuaries_climate_index.htm
  • www.Artemis.bm “Climate Index suggests rising frequency of costly weather events” http://www.artemis.bm/blog/2017/01/25/climate-index-suggests-rising-frequency-of-costly-weather-events/

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About the author

David Hudson

David Hudson is a current student member of the Institute of Actuaries of Australia and will complete his Part 1 studies in April 2017. He is a volunteer member of the Actuaries Institute's Climate Change Working Group and has completed research for the group in the areas of reporting climate risk and divestment of sovereign funds. David's move into the actuarial field follows a successful early-stage career as a mathematics teacher, encompassing both student education and faculty management. Enticed by the opportunity to utilize more complex mathematical and statistical methods, David is excited to bring his communication skills and mentoring abilities to the discipline of actuarial studies.

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