An Imperfect Storm
accurate American citizens and businesses want their forecasts
to be—and how willing they are to pay for the infrastructure to
support such an improved system.
How Actuaries Are Playing a Role
Meteorology and forecasting is commonly the stomping grounds
of earth scientists. Think a weatherman gesturing on the local
news or geophysicists debating risks posed by climate change.
But increasingly, weather modeling and forecasting is touching
the lives of many actuaries.
Take Oliver D. Bettis, a London-based actuary who is chairman of the Resource and Environment Board for the Institute
and Faculty of Actuaries (IFoA) in the United Kingdom. Bettis
writes regularly about the risks of climate change as it relates to
businesses, citizens, and institutions.
In 2009, he co-presented a session on the “Risk of Ruin From
Climate Change” [ 15] at the United Nations Climate Change Congress
in Copenhagen. His lecture has been updated and presented again
many times since, in an effort to marry climate change with risk
Bettis uses “ruin” as shorthand for an extreme bad-case outcome,
or a tail risk. While that’s clearly not a high-probability event, it is
still a possible event—and thus one worthy of analysis.
“As part of the regulatory regime for protection of policyholders,
insurance companies must estimate their risk of ruin, ruin being
defined as insolvency of the company,” Bettis wrote in a synopsis
of his presentation.
“A common standard is to limit ruin probability to less than
1 in 200 over one year. An analogy with this approach could be
used to investigate climate change, i.e., an attempt to estimate
the tail risk, with a discussion about what is an acceptable level
of tail risk.”
Bettis formerly served as chairperson of the IFoA’s Resource and
Environment Working Group, which is charged with helping the
profession and the public make sense of the current issues—from
a risk management perspective of insurers and also to help poli-
cymakers understand what’s at stake and what the chances are of
a truly catastrophic climate event in the future.
An actuary doesn’t have to have Bettis’ large stage, however,
to participate in public debates about climate risks for businesses
At minimum, actuaries working in general insurance should
have the same awareness that Bettis did when looking at weather
data and how it affects property and casualty policies.
And increasingly there is a role for actuaries in green investments
and energy consulting, where professionals are relied on to make
very long-term predictions about electricity demand trends and
generation costs to prove that large-scale, long-term investments
are practical and will pay off.
And, of course, the American Academy of Actuaries and its
members, along with the Casualty Actuarial Society, the Canadian
Institute of Actuaries, and the Society of Actuaries, are jointly
developing the Actuaries Climate Index (ACI) and the Actuaries
Climate Risk Index (see sidebar, page 22). These tools and data
focus on measuring the frequency and intensity of extremes in
key climate indicators based on controlled observational weather
data across the United States and Canada.
In fact, in June the ACI just reached a new composite high—
hinting at the urgency posed by climate and weather issues and
the importance of data-driven analysis in crafting a solution.
There are many challenges ahead for the United States as
weather modeling becomes more challenging and climate change
continues to create uncertainty. But there are also important
roles for actuaries in crafting future solutions to the challenges
JEFF REEVES is a financial journalist with almost two decades
of newsroom and markets experience. His commentary has
appeared in USA Today, U.S. News & World Report, CNBC, and the
Fox Business Network.
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