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Setting Premiums and Predicting Insurance Pay Outs in a Changing Climate

Four major US and Canadian actuarial organizations – The American Academy of Actuaries, The Canadian Institute of Actuaries, The Casualty Actuarial Society, and The Society of Actuaries – sponsor the maintenance of a relatively new index, the Actuaries Climate Index™.  The Index was established to measure and record deviation of weather extremes and sea levels from historically expected patterns in the US and Canada.  On October 5th, the group announced a new record high for the 2016-17 winter.  More specifically, the latest numbers reflect an unappealing trend:

“The most recent five-year moving average Actuaries Climate Index value for winter 2016– 17 is 1.14, up from 1.07 the previous quarter. This value is the highest level recorded and expresses units of standard deviations from the mean for the 30-year reference period of 1961 to 1990 for the United States and Canada combined.”

More than ten years ago, actuaries started talking in earnest about changing predictive models to account for climate change.  Most models were based on historical data, using long-term statistical methodology. But a warming planet and its resulting unpredictable extreme weather were making this kind of long-term back casting increasingly unreliable as a predictive modeling tool for setting insurance premiums.

The Index is based on analysis of neutral, scientific data collected since 1961. It’s objective data gives actuaries, public policymakers, and the general public a more accurate sense of the changes in the frequency of extreme climate events over recent decades. The Index includes data on high and low temperatures, high winds, heavy precipitation, and drought, as well as changes in sea level, and is updated quarterly on ActuariesClimateIndex.org.  Another index, the Actuaries Climate Risk Index, is currently being developed to correlate the frequency of extreme events with economic losses, mortality, and injuries. Watch for this as a bellwether of changes in how the insurance industry does business.

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