Incorporating Climate Change Projections into Risk Measures of Index-Based Insurance

Abstract

We use regional climate model projections to quantify long-term projected changes to risk measures for an example set of temperature index–based insurance products in California. This region is a major agricultural producer for the United States and the world. The climate model projections are an ensemble of six regional climate model runs obtained from the North American Regional Climate Change Assessment Program. Hindcasts for the period of 1971–2000 are compared to historical observed temperature data for bias and variance corrections. Adjusted future model projections are used to estimate distributions of cooling degree days for 2041–2070, which are then used to estimate risk measures for index-based insurance products to demonstrate the scale of changes that climate models project through mid-century in actuarial terms. More broadly, this article provides an illustration of the use of climate data products to explore actuarial risks.