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Actuaries track climate risk with new index

Elayne Grace, Actuaries Institute

The Actuaries Institute has launched a climate index, providing policymakers and businesses with a measure of the frequency of extreme weather conditions and changes to sea levels.

The Australian Prudential Regulation Authority has given the index its blessing, saying the initiative was a “positive step towards helping regulated entities to understand and manage the potential impact of climate risk on their businesses.”

The Australian Actuaries Climate Index will track changes in the frequency of extreme high and low temperature, heavy precipitation, dry days, strong wind and changes in sea levels. The index will be updated quarterly and will include a number of sub-indices.

The index was collated by Finity Consulting, after consultation with the Bureau of Meteorology, CSIRO and leading insurance and natural hazard scientists and regulators.

The index was built following the development of a similar tool in the United States and Canada, with the support of the Society of Actuaries and American Academy of Actuaries.

Finity Consulting principal Tim Andrews says: “The index is designed to help us understand how extreme weather, and hence risk levels, may be shifting as a result of climate change.”

Actuaries Institute chief executive Elayne Grace says Australian financial institutions can reference the index to help meet their commitments to adopt financial risk reporting measures.

In 2017, the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures issued recommendations for an international standard for disclosing climate risks.

Also last year, APRA warned that the risks of climate change were “foreseeable, material and actionable now.”

The first Australian Actuaries Climate Index report, published this week, covers the period 1981 to 2018 and shows that the frequency of extreme conditions in autumn 2018 was higher than the historical extremes for autumns in the baseline period.

Grace says: “We hope to build on the index by attaching risk data, such as damage to property and health statistics, in order to understand the relationship between weather extremes and risk, enabling more explicit risk indices to be developed.”