Building resiliency to climate risk

Building resiliency to climate risk | Insurance Business

Building resiliency to climate risk

As global temperatures rise, severe weather events are expected to increase, causing damage and losses to businesses all over the world. Climate change is one of the largest risks to the global economy, with Swiss Re Institute estimating that US$4.2 trillion to US$13.8 trillion of the world’s financial assets are at risk from the impact of climate change.

To adapt to this rising risk environment, businesses need to build resilience to climate change. According to Andre Martin (pictured), head of innovative risk solutions, APAC, at Swiss Re Corporate Solutions, climate resilience is the ability to withstand or recover from the impacts or shocks of extreme weather events, like typhoons, bushfires or floods.

“As such, resilience is a broad term but usually includes increased awareness or better anticipation of events, adaptation through risk mitigation or risk reduction, and the capability of absorbing shocks, if and when an event occurs,” he told Corporate Risk and Insurance.

In order to achieve this resiliency, Martin said that businesses must be aware of and quantify their exposures to climate risk. However, corporations are often not fully aware of all their exposures, which lead to protection gaps.

According to Martin, once the full risk landscape is known, the measures to build and increase climate resilience can be grouped into two categories: pre-loss mitigation and post-loss risk transfer.

“The former are approaches generally directed to mitigate the exposure or reduce the impact, assisted by professional risk engineering and loss prevention services,” he said. “The residual risk that cannot be mitigated is too large to be retained and can then be transferred to insurers or capital markets. Here, the insurance industry is continuously expanding its offering beyond the traditional fire and property policies.”

While damage to property from typhoons, fire or water are generally covered by traditional insurance, Martin observed that there is increasing interest in parametric or index-based insurance solutions to protect against the pure financial impact of some climate change risks as a complement to traditional insurance programs.

These parametric or index-based insurance solutions are based on pre-agreed event triggers and pre-agreed payouts. According to Martin, these rely on the measurement of an event or index – such as temperature, wind speed, or precipitation to determine when to make a payout. Unlike traditional indemnity insurance policies, these are independent from an underlying physical asset. As such they offer the possibility to insure perils and exposures currently deemed uninsurable.

“Another strong rationale for parametric insurance – in particular for governments and local councils – is liquidity,” Martin said. “The simplicity and transparency of the loss settlement process allows for very fast claims payment post event, usually within a few weeks. This provides government agencies quick access to cash for emergency relief actions like shelter, food, and water after disaster strikes.”

Importance of pro-active mitigation
Martin stressed that being aware of the exposure is important, but not enough. The pro-active mitigation of climate risks is increasingly seen as a corporate responsibility, not just to society but to shareholders. To achieve this, an important part of the insurance industry’s role includes raising awareness on the benefits of pre- rather than post-disaster financing.

“Swiss Re, via our risk engineering teams, works closely together with our clients to help to understand, control and reduce their risk landscape and exposure to extreme weather events,” he said. Our offer includes risk-assessment tools such as Cat Net which is our web-based hazard tool. Aside from giving clients an overview of natural hazard risk metrics for all their locations, it can also visualize climate change impacts. Clients can, for example, overlay temperature change out to year 2035, sea level rise out to year 2100 and precipitation change in summer and winter on the global map.”

Swiss Re also recently launched a peril-specific flood risk assessment tool, known as FLOAT, which uses drone technology to visualize a specific client’s vulnerability to flood. Increased precision allows for a better understanding of a business’s risk to flood and more effective risk mitigation measures to be implemented. 

“To ensure sustainability in the long term and to continue to be able to protect our clients in times of catastrophes, the insurance industry needs to actively embed and dynamically track the effects of the warming climate, adapting models to a profoundly changing risk landscape,” Martin said. “While climate change is still a manageable risk for the insurance industry today, we need to focus more on the detection and understanding of new trends in loss developments in the future.”