Hurricane Ian's aftermath in Florida as it leaves behind flooded houses.
Actuaries of the present and future are being asked to update their analytical and predictive modeling toolboxes in response to climate risk developments.
From hurricanes to winter storms, climate change is a surging topic in actuarial research
Oct 03, 2023, by Emma Bartlett
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Retreating ice sheets, rising sea levels, warming and acidifying oceans, strengthening hurricanes, drought, wildfires: Climate change and escalating natural disasters have become a focal point for actuaries as they identify, quantify, and help manage risk for clients. 

“It's a very active area of actuarial research right now,” says Rick Gorvett, Ph.D., College of Arts and Sciences’ Mathematics and Economics department chair who’s a Casualty Actuarial Society fellow. “We're seeing more extremes. Recent data indicates that the frequency and severity of significant natural events is increasing.” 

While there are ways to model the occurrences and financial impacts of hurricanes, Gorvett admits that predicting and managing climate change risk is particularly challenging for at least two reasons. First, historical data are difficult to interpret and require a long period of collection. Second, weather-related phenomena are notorious for being chaotic and hard to predict. 

Nevertheless, Gorvett says, insurance companies are experiencing substantial losses from hurricanes, floods, and wildfires. Actuaries of the present and future are being asked to update their analytical and predictive modeling toolboxes in response to these risk developments — causing Gorvett to address this new dimension of risk management in the classroom. In his “Ratemaking” course, actuarial mathematics undergraduate students spent the last week reading an article on climate change risk and responding to questions on a fictitious, but reality-based, case study. 

“The problem with catastrophe risk is there's a lot of variability within this low-frequency, high-severity type of loss,” Gorvett says. “There are few losses, but they can be huge and impactful events that broadly affect people, organizations, and financial conditions. Modeling the potential implications for people, property, and society is an immense challenge.”

Rick Gorvett speaks at the front of the room.
Mathematics and Economics Department Chair Rick Gorvett, Ph.D., notes that climate change risk is currently a very active area of actuarial research.

Actuaries’ work will help support adaptation and resilience to climate change, and their skills can be applied to things like upgrading building codes and land use policies. Advanced analytics techniques and climate-specific scenario analyses will assist traditional catastrophe prediction models. 

Climate change has also opened new areas of risk management for actuaries and influenced innovative solutions. According to the United Kingdom’s Institute and Faculty of Actuaries, the insurance industry is providing microinsurance to low-income populations to cover lower-valued assets as well as weather-based index insurance which takes advantage of developing technology and helps farmers. Additionally, reducing society’s carbon footprint has led to new technologies like solar panels and electric cars — all of which will need insurance and risk management. 

Although actuaries are helping people adapt to climate change, challenges still exist. Many insurance companies have raised premium rates in response to climate change’s emerging data and have sometimes pulled out of certain markets if they are not allowed to charge premiums sufficient to cover losses and expenses. 

Gorvett explains that insurance is largely regulated at the state level, and generally each state’s insurance department and commissioner is responsible for approving or denying an insurer's request to change their rates. If insurance becomes unavailable in an area, the government may step in and either force insurers to sell policies at inadequate rates or create a mechanism in which the government has a role in providing the insurance protection.  

“If the government comes in and subsidizes risks where there is no viable free market for insurance, it still has to be paid by somebody; either the taxpayers or the insurance industry will get surcharged for those losses,” Gorvett says. “You can then start getting cross-subsidies, which often results in the people who can least afford it paying more than their fair share.”

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