The Spring 2020 update to the Australian Actuaries Climate Index (AACI) has been released this week by the Actuaries Institute, showing the season exhibited extreme weather in comparison with Spring in previous years. This season reported the highest ever composite index value for Spring.
While an index value of this level in the spring reflects less severe overall conditions than would be seen in summer, it remains a noteworthy data point in the ongoing shift towards more extreme weather in Australia. The AACI is calculated by Finity Consulting for the Actuaries Institute at the end of each season, following the release of data from the Bureau of Meteorology.
Looking back, the May 2020 AACI release found records were set across Australia’s 2020 Summer for extreme high temperatures and consecutive dry days. The 2020 weather conditions were reflected in both the destructive 2019/20 bushfire season and the extreme hail-storms. Despite the warmth experienced during the Spring of 2020, conditions today are far less extreme than they were a year ago, and, importantly, there has been an increase in precipitation during the past year which has reduced the overall risk of bushfire. Despite that, the current WA bushfires are a reminder that the risk of fires exists in most years, and highlight the fact that due to its size/location Australia experiences different weather systems in different places.
Notes to chart: Red bars indicate a reading which is above the reference period average and blue bars indicate a reading which is below the reference period average. The black line shows the five-year moving average and provides a robust measure of how the index and weather extremes are trending over the longer term. Further details on calculation and interpretation are available in the Design Documentation here.
The primary drivers of the index this Spring were high temperatures, rising sea levels, and rainfall in some regions. The Bureau of Meteorology said the Spring of 2020 was Australia’s warmest on record. It also confirms that while rainfall was below average for much of the country, certain parts of WA, SA and western parts of NSW and VIC experienced high levels of rain.
The index provides a unique perspective on Australia’s climate by focusing on extreme values of weather metrics and sea levels. Extreme values (above the 99th percentile) provide insight into the type of conditions which drive property losses and insurance claims.
Actuaries Climate Index, a global focus
Finity Principal Rade Musulin, who serves as Convenor of the Actuaries Institute Climate Change Working Group and Vice Chair of the International Actuarial Association’s (IAA) Resource and Environment Working Group, has had long experience with these indices. He was involved with the initial development of both the North American Actuaries Climate Index and the AACI, and now oversees the production of the AACI.
“Interest in climate indices is growing across the world. The IAA’s Climate Risk Task Force Liaison’s group, which serves as a coordinating body for various climate related projects, held a call in late 2020 where we outlined how these indices have been constructed, the data sources used, the mathematical calculations, and how they have helped stakeholders better understand climate-related drivers of losses.” Rade said.
Rade also gave a presentation to the Actuarial Society of South Africa in November summarising the discussions at the IAA, a copy which can be seen here.
Discussions are underway in a number of countries about building similar indices. Currently, the indices have to be tailored to the specific conditions and data available at a national level, but eventually it is hoped that versions of the indices can be constructed using data and methods that will allow them to be combined or constructed in a manner which supports multi-country comparisons. Generally, the Australian and North American indices show similar trends (see slide deck #17 and #19) despite having some technical differences.
Both Australia and North America are looking to develop Version 2 indices. In Australia the Climate Change Working Group (CCWG) will be reviewing the current index during 2021 to determine if any improvements can be made. The North Americans are exploring a number of changes to the current index, including:
- Smaller geographic regions and/or different approach for summarizing local data across regions.
- Using finely gridded reanalysis data.
- Improvement of weather metrics to achieve better correlation with actuarial risks.
- In addition to standardized results, presentation of results in their “natural” or unstandardized units– for example, increase in mean temperature in degrees C or F, or increase in the frequencies of various extreme events.
- Development of the Actuaries Climate Risk Index (ACRI, ACRI.pdf (actuary.org)), which will compare the climate indices with loss data to determine the relationship between climate metrics and losses.
Released in January 2020, the US based ACRI has been developed off the back of the 2016 Actuaries Climate Index (ACI). The ACI assesses the frequency of extreme weather events using six components: drought, precipitation, high temperature, low temperature, sea level, and high winds. The ACRI looks at the relationship between these environmental variables and publicly available loss information with the aim of quantifying impacts on property losses. The ACRI is calculated as the difference in modelled losses arising from movements in ACI components from their reference period mean values. The model found that the resulting ACRI is US $24 billion in the 16 years to 2016, equating to a 3.3% increase of the exposure-adjusted losses during the period. The Australian Institute will be discussing whether a similar risk index can be developed here.
These climate index projects have helped establish the actuarial profession as a valuable contributor to society, business and governments understanding of climate risk. For over a decade, Finity has contributed to the understanding of the risks associated with climate and ways to measure and manage these challenges. Read more about the Australian Index here or Finity’s consulting work in this area here.
For over a decade our Climate Risk Practice has provided clients with business solutions developed from our deep understanding of the physical and financial risks associated with natural perils such as storms, floods, bushfires and cyclones. Read more about our Climate Risk team.
References to temperatures, dryness etc. are based on the data underlying the AACI, which tracks changes in the frequency of extreme high and low temperatures, heavy precipitation, dry days, strong wind and changes in sea level, mainly concentrating on the 99th percentile of observations.