Actuaries Climate Index

Last Updated: 12/23/2023

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 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 ACI. The ACI measures changes in climate extremes, while the ACRI relates those climate extremes to economic and human losses.

The ACI and ACRI were 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). They are intended to be educational resources for the insurance industry and the general public on the impact of climate change. Actuaries may use their components to develop 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 and risk into the potential impact of climate change and modeled losses. This makes it harder for insurers to identify their tail risk, or the risk of severe catastrophic losses which 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 and quantify the validity of these perceptions for proper risk management. However, most climate data are published as averages over time instead of severe weather frequency, which is not useful to insurance actuaries as it makes it difficult 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), aiming to more accurately assess 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, designed to be an objective and easy to understand educational tool, 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 business. For instance, a high index for drought could indicate increased potential for wildfire risk and resulting property damage. 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. It 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 could fine tune the ACRI calculation to generate a risk management strategy that considers how extreme weather conditions as a result of climate change might increase property loss or mortality rates and access how such events impact stakeholders.

The ACI, released November 20, 2016, is a risk assessment tool showing different trend lines of different types of risk. 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 component.

Additionally, 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 is 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.

According to an ACI press release issued in August 2023, the five-year average increased slightly over the previous season. As of data from February 2023, the five-year average now sits at 1.19 relative to an average of zero during the 1961–1990 reference period. The ACI can be found at www.actuariesclimateindex.org.