Contingencies Online - July/August 2009

IN 1999, Contingencies ran an article by Andy Peara and Evan Mills suggesting that actuaries may be able to play a greater role in climate-change issues by active participation in climate-change research (“Climate for Change: An Actuarial Perspective on Global Warming and Its Potential Impact on Insurers,” January/February 1999). Ten years on, the topic remains timely.

Because it will be among the first to feel the effects of climate shifts, the insurance industry is the canary in the coal mine for climate change. As a result, the insurance industry and the actuarial profession have a particularly important leadership role to play. To enhance the actuarial profession’s educated capacity in this area, the Casualty Actuarial Society (CAS) earlier this year established a permanent committee to consider the issue of climate change and to “recommend, support, and perform research on climate change and assess the potential risk management implications for the insurance industry.” It’s important to note that while the media focus largely on global warming, climate change considers more than just temperature changes: It includes precipitation trends, humidity, soil moisture content, cloudiness, storm tracks, long-term weather trends, sea-level changes, glaciers, polar ice, and more.

basis. The reconstructed global temperatures suggest that the current climate is perhaps the warmest in at least the past millennium. The unusual nature of the warming spike in the second half of the 20th century is further supported by paleoclimatic information. As Richard Wolfson, professor of physics at Middlebury College, and others have pointed out, these interpretations are based only on collected and reconstructed data, not climate models.

Global average temperature increases are not spread uniformly over the earth. In particular, the higher latitudes experience greater increases. Ice core samples suggest that it may have been 125,000 years since the polar regions were materially warmer for an extended time than they are now.

While the debate continues, the evidence supports the very high likelihood for a warming trend. Accordingly, the focus is shifting from whether the earth is getting warmer to understanding the implications of its warming.

Is the Earth Getting Warmer?

The preponderance of evidence indicates that Earth is warming, especially in recent decades. The 2007 report of the Intergovernmental Panel on Climate Change (IPCC), a scientific intergovernmental body set up by the World Meteorological Organization and by the United Nations Environment Program that was a co-winner of the 2007 Nobel Peace Prize, summarizes the situation as follows:

Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global average sea levels.

This conclusion is based on thermometric temperature records for the past 150 years and proxy indicators that corroborate the thermometric observations. These proxies are physical quantities that serve as temperature surrogates and include annual tree rings, coral reefs, lake sediments, isotope ratios, etc. Statistical methods are used to combine the proxies to reconstruct temperature patterns on a global

Are Humans at Fault?

It’s very likely that humans are playing a key role in earth’s current warming trend.

Global temperature depends on many factors that can be identified and mathematically quantified, e.g., the Milankovitch cycles (cycles in Earth’s orbit that influence the amount of solar radiation hitting different parts of the earth at different times of the year), fluctuations in solar output, atmospheric gases, etc. In terms of atmospheric gases, carbon dioxide (CO2) concentrations in the atmosphere correlate closely with global temperatures, and CO2 levels are rising. The 2007 IPCC report summarized the considerable research in this area:

Global atmospheric concentrations of carbon dioxide, methane, and nitrous oxide have increased markedly as a result of human activities since 1750 and now far exceed pre-industrial values determined from ice cores spanning many thousands of years. The global increases in carbon dioxide concentration are due primarily to fossil fuel use and land use changes, while those of methane and nitrous oxide are primarily due to agriculture.