Insurance Information Institute (I.I.I.) chief actuary James Lynch on an innovative actuarial approach.
It was a record-breaking rainy day in Colorado Springs when I attended a panel last month describing a new climate index the actuarial community is introducing.
The 1.58 inches of rain that fell May 19 almost doubled the previous record for that day. The Actuarial Climate Index (ACI) is intended to monitor how often extreme events – blistering heat, shivering cold, record winds and rain – strike 12 regions in North America.
It addresses an interesting conundrum about insurance and climate change. Given that the climate is changing – though quite a few in the industry dispute that – how can insurance incorporate the change into pricing?
The ACI, which will be introduced later this year, tries to address that. It will measure how many severe events occur every quarter. Since catastrophes are an important component of claim costs, changes in the long-term trend can affect insurance prices.
As I wrote for the Casualty Actuarial Society (CAS):
Insurance prices are famously based on historical data, trended forward. The index would help show whether extreme events are becoming more or less common, and actuaries could trend this information forward to set rates.
Actuaries have been working on the index for a couple of years. Historical data has shown that over the past few years, the frequency of extremely hot days has increased, while the frequency of extremely cold days has decreased. The overall ACI climbed from the 1990s on, though it appears to have leveled off in recent years.
In its Facts and Statistics section, the I.I.I. gives comprehensive snapshots about catastrophes, both in the United States and worldwide.
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