Assessing the applicability of the Actuaries Climate Index within weather derivatives framework

Date

2024-09-04

Author

Yavrum, Cem
Kestel, Sevtap Ayşe

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The global climate change has emerged as one of the most complex and pressing challenges confronting humanity. With the impact of climate change intensifying, a growing number of industries, such as agriculture, insurance, energy, and tourism, find themselves increasingly vulnerable to weather-related risks. In response to this challenge, industries, organizations, and even individuals have the opportunity to utilize weather derivatives as a means to manage or mitigate these risks. Weather derivatives are financial instruments designed to hedge against adverse weather conditions, with their value contingent upon specific weather variables. Since 2016 the Actuaries Climate IndexTM(ACI) has integrated diverse climate variables indicative of extreme weather conditions. The ACI serves to enhance the comprehension of climate trends and their potential impacts among actuaries, insurance companies, and policymakers through a monitoring tool focused on climate change indices. Drawing on data from twelve subregions across the United States and Canada, the ACI assesses six climate indicators, including high and low-temperature extremes, precipitation, drought, extreme wind, and sea level rise. Weather derivatives with underlying variables sourced from the components of the ACI, this study seeks to evaluate the effectiveness of the ACI in managing weather-related risks for market participants. Additionally, it aims to highlight the ACI’s potential as a dependable benchmark for pricing weather-related financial instruments, potentially encouraging wider adoption of the index in future risk management strategies.

URI

https://fam.tuwien.ac.at/events/cci2024/
https://hdl.handle.net/11511/114731

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Graduate School of Applied Mathematics, Conference / Seminar