Climate Index launched as a new risk assessment tool

South African insurers, regulators and policymakers have a new tool at their disposal to assess, manage and price the risk of extreme weather events linked to climate change, which are becoming more frequent as the planet heats up.

The Actuarial Society of South Africa Climate Index was formally launched on Wednesday, 5 November, at the organisation’s annual conference in Sandton.

“It’s forming a standardised basis for actuaries to measure change in the climate so that it can be tracked in a standardised manner,” Dr Rendani Mbuvha, an associate professor at the Wits School of Statistics and Actuarial Science, who led the initiative, told Daily Maverick.

“This would include incorporating it into credit risk modelling and insurance pricing such as agricultural and property insurance, and so on,” he said.

The index, whose data dates back to 1981, has clearly shown spikes that have coincided with extreme and costly weather events. The index features regional breakdowns within the provinces: “In the KwaZulu-Natal floods of April 2022, we saw that it was the highest it had been in terms of precipitation in the province,” Mbuvha said.

Read more: In the wild world of KZN, disruptive floods are now a seasonal reality — this is what we need to do

The economic damage inflicted by the floods was estimated at more than R50-billion. Santam estimated its gross exposure to the event was R4.4-billion.

“If you look at wildfires in the Knysna region in 2017, you can see that the drought component was elevated at the time, and there were sufficient conditions for wildfires to start,” Mbuvha said.

Read more: Devastation in Knysna: A photo survey

So, one of the many uses of the index is as a warning signal. If its drought or rain components begin spiking to dangerous levels in certain regions, it’s high time to prepare. This means it could literally prove to be a life-saver.

South Africa’s summer grain-growing regions have the promise of La Niña rains this season, but the next El Niño could be a scorcher, if recent events are anything to go by. This index could be a key advance indicator of deluge in the first case and drought in the second.

“In South Africa, an actuarial climate index [ACI] targets key hazards – convective storms and hail, floods [example: KwaZulu-Natal], multiyear drought and heat, wildfire and coastal surge – amid rising catastrophe losses and tighter reinsurance markets,” according to the presentation that Mbuvha and Dr Nadine van der Walt, of actuarial consultancy Riskscape, shared at the conference.

The wheel has not been reinvented here, and the South African ACI has drawn from others around the world. The South African ACI’s components track extreme maximum and minimum temperatures and precipitation as well as drought. The composite averages the standardised anomalies of all components to provide an overarching view of climate extremes.

Among the results that have been gleaned by the architects of the index is “[…] a relationship between flood risk and decreases in average residential real estate market values”, based on a KwaZulu-Natal case study.

Future developments envisioned for the Climate Index include new components focused on hail indicators, extreme wind and fire-leading conditions. And who knows, maybe some day it will include tornado risk or the risk of fire tornadoes, a terrifying new phenomenon linked to climate change.

The risks from climate change are rapidly rising and record catastrophe after record catastrophe are exacting a grim toll. The poorest of the poor, such as subsistence farmers, are the most vulnerable, but the risks are across the board.

Insurers face a deluge of claims, while investments literally get dried up, washed away or burnt to the ground. Last year was the warmest year across our burning planet since records began, and the first year when temperatures – heated by fossil fuel usage – shot past the 1.5°C threshold above preindustrial levels. This all topped off the hottest decade on record.

Insurers in South Africa and around the world have been sounding the alarm over the affordability and sustainability of insurance cover in the face of the accelerating pace of climate change-induced extreme weather or catastrophic events – known as CATS – that have been sweeping the planet.

At least in South Africa they now have an additional weather vane to point to the direction in which risk could erupt from the skies – and make provisions for it. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.