Updating the Actuaries Climate Index – Listen up Republicans!

Ever since a data update arrived in my email from the Actuaries Climate Index in August I have been wanting to revisit one of my most re-tweeted posts from two years ago, called “Listen to the actuaries if not the scientists.” The short read here is that the climate continues to change in a dangerous direction, as determined not by the scientists, but rather by the statisticians relied on by businesses around the world to put a dollar figure on risk.

I personally have no problem listening to the scientists about climate change, but clearly one particular American political party does dispute the entire premise behind climate research. The same party, however, does put (excessive, in my view) reliance on the stock market as a measure of future economic growth. A voice listened to by most smart business executives is that of actuaries, who analyze business and demographic data trends in order to reduce the risk or to predict a company’s economic future. Indeed, the entire insurance industry lives and dies on the reliability of their actuaries.

The Actuaries Climate Index

The ACI is sponsored by four collectives of actuaries from the U.S. and Canada. Their index has identified six independently measurable, climate-related data histories from North America that they see as most correlated to identifiable business risks, in other words, the potential of real money losses. These datasets are:

  • The frequency of extreme high temperatures (above the 90th percentile).
  • The frequency of extreme low temperatures (below the 10th percentile).
  • The frequency of high winds.
  • The maximum amount of heavy precipitation.
  • The longest period of consecutive dry days in the last 12 months.
  • The change in sea level.

Forget asserted political bias or distrust of scientists here. The ACI’s assertion is that you can correlate real risks to business cashflows from these climate measures, either collectively or individually, depending on your business. The climate events that impact local businesses most negatively are those that are outside the statistical norms. In other words, rainy places build expecting rain, but not for a one-in-one-hundred-year rain that now happens every ten years.

And so, how can you put a usable number on this kind of data? First, the ACI has arbitrarily specified baseline years. The data for the years 1961 through 1990 were statistically combined and “normalized” to provide a base index reading of zero. All this means in practical terms is “Do you remember the 60s through the 80s? Assume that those climate conditions were ‘normal’ and compare that time to the same data now.”

Differences from this “old normal” in more recent years are then measured in standard deviations from that norm (the Y axis in the graph below). The ACI website has different graphs for different parts of North America, as well as for each of the six component datasets, but here is the combined graph for the U.S. and Canada, with the black line tracking the five-year moving average:

An index reading of “1” in the current index (and we are currently at 1.17) indicates a year that would have been in the top sixth of “bad years” in terms of these factors during the 1961-1990 base-years, but is now “the new normal.” [1] That does not mean that we still won’t have cold, snowy winters in Michigan (indeed, record cold events have also increased), but rather that more extreme events are statistically happening with more regularity. And it is the extreme events, whether hot, cold, wet, or dry, that cause business headaches and losses of real dollars.

The data behind sea level rise

Shown below is the ACI for one component, sea level rise, and in one area, the southeast U.S., where I currently live. Sea level rise is the measure showing the most statistical change in some parts of North America. This data comes from registered tide measurement stations in these regions. So, what does a moving average reading of four mean?

In statistical terms, the four-standard-deviation point is well off the chart on a normal distribution. In other words, we are seeing “normal” sea levels in this part of the country that were never seen during the base years up to 1990. The “new normal” has “king tides” filling residential streets from Virginia Beach, Virginia south to Key Largo and other Florida localities on a regular basis. In Louisiana, over 800,000 properties are now expected to be in substantial risk of flood within the next 30 years.

Localized flooding inland is more a function of “super-soaker” storms. The “extreme precipitation” component of the ACI has been on a steady rise as well. There is more regional disparity in this measure, with the Northern Plains region drier than in earlier years but the Midwest much wetter. Both of those changes are bad news for many farmers and other businesses. Impacts are not just related to insurance costs. Municipal infrastructure and disaster relief take a huge hit whenever bad weather visits, diverting tax revenues and services to recovery rather than to more direct support of constituents. Already fragile small farming towns in the ever-drier Great Plains do not have a good future,

Those hurricanes and political winds

Even with a record 30 named tropical storms so far in 2020, weather forecasters are always cautious to point out that “Weather is not climate.” But you can evaluate whether this season was “climate caused” in the same way the Actuaries Climate Index is used. The better question is “How likely is a 30-storm season to occur at this year’s overall ACI index versus in any base year?”  If you are an actuary, or an investor who places substantial “business bets” that rely on actuaries being correct about the future, then the answer to that question is clear. We will see more bad tropical storm and hurricane years in the future, not fewer.

Political winds change with the times as well, but it always worth reminding people that the Environmental Protection Agency came into being during a Republican administration in 1970. One can say a lot of negative things about the Nixon Administration, but the denial of science was not one of them. During my youth, the pursuit of science was a bipartisan hallmark of the post-WWII era. Now state-employed scientists in Republican-dominated states cannot even use certain climate science words in their public communication.

The missing conservative side of the climate conversation

There are good conservative arguments missing from much of the climate change discussion, lost in the destructive rhetoric of science-denial. Carbon credits, for instance, were originally a product of conservative free-market economists, proposing economic penalties for destructive environmental “externalities.” [2] The wide array of climate mitigation proposals now being floated need the rigor of classic cost-benefit analysis as a key input to political decision-making, but the Republican fight is being waged in the “stupid zone” instead.

The rise of the coronavirus threat in the United States continues to expose the anti-science blood coursing through the veins of the Republican Party. The Trump Administration has systematically gutted the nation’s science-related agencies of professionals who push environmental concerns. Overt denial of climate change has become almost ritualistic in Republican circles, even as the smart business folks in the party hedge their bets with the pro-climate change findings of the actuaries and the backstopping of the insurance industry. The math-challenged lawyers who continue to insist that Trump won the 2020 election, despite losing by over 7 million votes, poison the innumerate public discourse with conspiratorial nonsense.

The people in the street are literally played for suckers, as Donald Trump continues to raise small-dollar donations to fund his post-presidency. Will the party be there to protect you from the next climate disaster?


Notes:

  1. About one-sixth of a normal distribution (~16%) is located over one standard deviation () above the mean:
    Normal distribution
    Wikipedia
  1. Externalities are the unintended consequences of commercial or industrial activity that negatively impact surrounding communities or the environment. When a business is not financially penalized for polluting then some business somewhere will inevitably capitalize on cost-saving, but polluting, manufacturing processes.

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