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The Actuary The magazine of the Institute & Faculty of Actuaries

Biodiversity nature’s insurance policy

One of the concerns about climate change is the
prospect of a major extinction of species.
More obvious is the loss of species already occurring through deforestation in the tropics and land-clearing for agriculture and urban development. Many scientists argue that the world is facing a mass extinction event. The underlying reason for concern is described as the loss of ‘biodiversity’.
How many species are there anyway? What is a significant extinction event and what impact could such an event have on the remaining life on the planet, including human beings? Answers to these questions are required so that governments can justify taking actions now to conserve biodiversity in order to prevent a deterioration of quality of life for future generations.

How many species are there on earth?
Before considering the significance of species extinction rates, one needs to know how many species there are. Estimates of the number of species on earth range from 2m to 50m with the greatest concentration of diversity in tropical rainforests. This is a big range in numbers and demonstrates the uncertainty of the whole issue.
One often-quoted study was made by Terry Erwin in 1991. He fogged with insecticide 19 trees of the same species in a tropical forest and counted the number of species of dead beetles that dropped out of the canopy. The process was repeated at different times of the year. He identified 955+ species of beetles. From this hard data the extrapolation began, taking into account information like the number of species of trees in the forest, the proportion of host-specific (living only on one tree) as against transient species, and the number of species on the ground compared to the number in the canopy. Experts estimate that beetles make up 40% of all insect species. Erwin finally came up with a total of 30m species of insects worldwide.
With these surveys, the more you look, the more you find. Initially, the IBNR (incurred but not reported) rate is very high. A large number of surveys is required until one starts to reach the stage where the chain ladder starts to flatten out, that is, the number of new finds is reduced significantly. May came up with another method. He made estimates of between 10m and 50m assuming a simple inverse relationship between body size and the number of species (see figure 1). He used the function S ˜ L-x (where S = number of species, L = body length, x is a factor between 1.5 and 3).
While by far the greatest number of species is found in the invertebrate world, the loss of species that comes to the attention of general public is the larger animals and birds, in particular the cute and cuddly ones. I will discuss briefly later whether this is barking up the wrong part of the tree.

What is a significant extinction event?
The fossil and geological records indicate that the earth has undergone five mass extinction events in its history. These were mostly caused by volcanic eruptions which led to major climatic changes and resulted in the reduction of more than 50% of species existing at the time. These extinctions, in fact, laid the groundwork for major progressions in evolution such as the rise of mammals. Overall, some 90% of species that have ever existed are now extinct but only palæontologists, geologists (and maybe actuaries) think about things over such long time horizons.
Having established a broad idea of the number of species, the current rate of extinctions can be placed in some sort of context. We first allow for background extinction rates, the normal natural selection type extinction rate. This is believed to be a net total of one to ten species per annum or between 0.001% and 0.01% per century.
The current estimates of loss of species through human activity are 1,000 to 10,000 times the background rate. The rate has been accelerating over the past half-century as illustrated by figure 2. It has been predicted that 20% to 50% of total species could be lost over the next century.

What is biodiversity?
Forest-clearing and climate change are reducing the number of species and they are also reducing the population within each species as their available habitats are reduced. This overall loss is described as a loss of biodiversity.
Biodiversity is generally classified into three levels:
1 Genetic diversity the total number of genetic characteristics expressed or recessed in all the individuals that comprise a particular species.
2 Species diversity the number of different species living in an area. A species is a group of plants or animals that are similar and able to breed and produce viable offspring under natural conditions.
3 Community diversity the variation of habitats present in a given area. An ecosystem consists of all living and non-living things in a given area that interact with one another.

Why is biodiversity important?
Remember those school biology classes about natural selection, how the dark-coloured moths survived the industrial revolution because they were camouflaged against predators when the trees became covered in soot? The light-coloured moths had to move elsewhere if they were to survive. But elsewhere they would have to compete with other species of light-coloured moths. So both dark and the fittest light-coloured moths survived but only because there was a diversity of types of moths and still a habitat for the light-coloured ones.
Biodiversity is not only about the variety of species that creates the opportunity for one species to take over where another has been unable to adapt to changes in their environment, it is also about diversity within species. Human beings have been able to survive major epidemics because there have been individuals with resistance to diseases like influenza and the black death.
As well as providing resilience for existing populations, biodiversity provides a gene pool for future evolution. From the human point of view, it provides opportunities to improve crop varieties and find new medicines. So biodiversity provides an insurance policy for nature in general and for human beings, in particular.

How are decisions made about conserving biodiversity?
Australia has international obligations to restrict the loss of biodiversity. When decisions are being made on whether land can be developed, federal legislation requires that threats to endangered species or ecological communities be a critical factor in the decision. Back to the earlier asked question: is a focus on iconic species the right way to go about conserving biodiversity? In my view this is the best we can do because our knowledge of total biodiversity is so limited. The threat to endangered animals is a surrogate measure of the threat to an ecosystem and all the biodiversity it contains.
The problem of creating a proper representation of the threat to global biodiversity can be illustrated from the World Conservation Union’s ‘Red List’ of threatened species in table 1. There are many times more insects than mammals in the world and yet this list shows half the number threatened. The number of threatened insect species must be much greater than 537!
How can actuaries contribute?
One of the difficulties of making decisions about conserving biodiversity is quantifying in some way the economic costs and benefits. This would be a great area for actuaries to get involved in and we have many of the necessary skills, for example demography theory, projections from uncertain data, risk assessment, and long-term financial analysis.