Last Updated 1/22/2020
Issue: The Actuaries Climate Risk Index (ACRI) illustrates the economic impact of climate risk and its evolution over time. It does this by integrating information about perils, exposures and susceptibility of exposures to harm by peril into the Actuaries Climate Index (ACI). The ACI measures changes in climate extremes, while the ACRI relates those climate extremes to economic and human losses. The ACRI is currently in development in partnership with 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 especially useful tool for the insurance industry. Actuaries could use the ACRI and its components to create predictive models of climate related losses and opportunities and to evaluate potential risks.
Overview: There are a number of risk perceptions related to the potential impact of climate change. Insurers need to be able to accurately and objectively assess and quantify the validity of these perceptions for proper risk management. However, actuaries lack climate data focusing on the frequency (rather than average) of severe weather to quantify the true incidence and impact of weather extremes. To address this, the four North American actuarial bodies collaborated to develop the Actuaries Climate Index (ACI) and Actuaries Climate Risk Index (ACRI). The ACI focuses on measuring frequency and intensity of extremes rather than averages. It is a composite of six underlying indicators: high and low temperature, heavy precipitation, lengthy drought, strong winds and coastal sea level. The ACI is combined with vulnerability and exposure measures (population and property values) by product line or region to produce the ACRI.
The ACRI is intended to aid the insurance industry in modeling for potential climate change related losses. It’s designed to assess what population and property are at risk of climate change related losses and quantify this risk. As such, the ACRI can be used by actuaries to assist them in quantifying climate change impacts on specific books of business. The regional and line of business ACRI can also be used for portfolio diversification decisions. The ACRI could be used as an actuarial pricing tool since it better reflects changes in long-term trends than trended historical data. The ACRI’s incorporation of hazard climate sensitivity makes it a useful tool in calculating the climate change “uncertainty or ambiguity” load in pricing and capital management. Additionally, like the ACI, components of the ACRI could be deconstructed, modified or substituted for independent components reflecting individual user preferences. Future research in this area is likely to fine tune the ACRI calculation to be of event more use to the insurance industry by using insurance losses instead of economic losses or incorporating insurance claims.
Status: The ACI is a risk assessment tool showing different trend lines of different types of risk. In the insurance world, it is the extremes that are expensive as more events occur at the extremes. The ACI illustrates what is driving the specific weather extremes. The ACRI will be even more helpful because it will also show the impact of infrastructure development values. Even though the rise in sea level is the same, some areas on the coast will be affected more than others due to development. Underwriters will be able to incorporate these indexes in their assessment of overall and specific risks. The host website for the ACI can be found at www.actuariesclimateindex.org.
Committees Active on This Topic
Actuaries Climate Index and Actuaries Climate Risk Index (American Academy of Actuaries, 2019)
- Overview of Actuaries Climate Index Research Project
- Overview of Catastrophic Events
- Emerging Risks: Climate Change
- Climate Extreme Impacts in the U.S.
- Post Catastrophe Insurer Insolvencies
Climate Change Risk Disclosure Initiatives
October 2013, CIPR Newsletter
Testimony and Speeches
Australian Actuaries Climate Index
Actuaries Adapt to Climate Change Using New Tools
Pinnacle, June 2017
Insurance Industry Initiatives to Collaborate and Partner for Catastrophe Resiliency
CIPR Newsletter, November 2016