Climate Index suggests rising frequency of costly weather events

A new climate index developed by the Climate Change Committee reveals the frequency of extreme weather events in the U.S. & Canada continues to rise, suggesting the potential for increased re/insurance industry losses, a trend supported by data from insurance and reinsurance brokerage group, Aon.

Launched as a free to access tool the Actuaries Climate Index™ measures changes in extreme weather events and sea level, designed as an educational platform for the benefit of actuaries, public policymakers, insurers, reinsurers, insurance-linked securities (ILS) players, and the general public regarding climate trends and their impacts.

The Index explores the continental U.S. and Canada, placed into 12 separate regions, with a higher index value indicating an increase in the frequency of extreme weather events.

The risks measured by the new Index compare average frequencies during the 30-year reference period 1961 – 1990, to quarterly seasonal data for six different index components collected from 1961 to the winter of 2016, explains the press release for the launch of the Index.

Higher index values point to an increase in the frequency of extreme weather events.

The Index shows that extreme weather events are now roughly three times more frequent than during the reference period. The data, which is collected from neutral, scientific sources, shows that the current five-year moving average value for the Index is 1.02, which remained well below 0.25 through the reference period.

The average value for the Index first reached 0.5 in 1998, before hitting 1.0 in 2013.

“These values indicate a sustained increase in the frequency of extreme weather occurrences and changes in sea levels,” explains the press release.

Actuaries Climate Index

As shown by the above chart the five-year moving average and season has increased over time, revealing that across the U.S. and Canada extreme weather events are now more frequent than ever.

An increase in the frequency of extreme weather events in the U.S. and Canada suggests a rise in the economic and insured losses from such events, something that is perhaps reflected in the Index. Furthermore, this trend was highlighted recently by insurance and reinsurance brokerage Aon, in its 2016 Annual Global Catastrophe Report.

The report claims that the decadal average of billion-dollar weather events has grown from 10 in 1980 to 1989, to 32 from 2010 to the present.

Aon’s report concludes that large, individual weather events are becoming more costly, highlighted by the reported $210 billion of economic losses and $54 billion of insured losses the broker’s catastrophe modelling unit, Impact Forecasting, recorded in 2016 as a result of catastrophes, the highest for the last four years.

As a free to use tool, accessible via the website, www.ActuariesClimateIndex.org, which will update the values on a quarterly basis, 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.

Interestingly, the entity provides some information on values for the most recent periods, as follows:

“For the U.S. and Canada combined, the value for winter 2016 was 1.46, the sixth highest level below the peak reached in the fall of 2015. The high value was caused primarily by high temperatures in the northeastern U.S. and eastern Canada as well as heavy precipitation in many locations.

“The current highest five-year average values by region are in the Northwest Pacific (British Columbia and Yukon Territory), Northeast Atlantic (New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island) and Southern Plains (Kansas, Montana, North Dakota, Nebraska, Oklahoma, South Dakota, Texas and Wyoming).”

The Index was developed by the Climate Change Committee, which is a concerted effort of the American Academy of Actuaries, the Canadian Institute of Actuaries, the Casualty Actuarial Society, and the Society of Actuaries.

And, according to the press release the organisations are working together to develop another index, called the Actuaries Climate Risk Index (ACRI), designed to measure correlations between changes in extreme event frequency, as measured by the Actuaries Climate Index™, and economic losses, mortality, and injuries.

The impacts of climate trends on the frequency and severity of extreme weather events is an ongoing, often debated issue within the global risk transfer market.

And while opinions vary, free, useful solutions such as the Actuaries Climate Index™ and data analysis from Aon, go someway to providing the re/insurance and ILS industry with a more comprehensive and accurate view of exposures and the impact climate trends might have, in a rapidly changing landscape.

It would also be interesting to see whether risk modellers could sensitise such an index to portfolios of risk exposures, making the index a potential for use in risk transfer triggers.