By Torolf Hamm, Senior Director and Global Lead, Physical Risks, Climate Practice, at WTW
Understanding amplified physical risk exposures
Last year, natural catastrophes caused more than US $350 billion in economic losses globally, with insurance covering less than a third of these losses at just over $100 billion.
Between January and June 2024, the US experienced more than $30 billion in insurance claims due to an above-average number of tornadoes, hailstorms and straight-line wind events. Texas, meanwhile, recorded its largest wildfire, which burnt 426,600 hectares.
The damages involved in these events often far exceeded businesses’ risk scenario planning considerations.
So, what can companies do to better identify, quantify and mitigate potential damage and ensure both effective insurance protection and more resilient operations in the face of escalating physical climate challenges?
With climate change exacerbating increasingly complex and inter-related natural catastrophe risks, organisations need smarter, more dynamic and comprehensive approaches to understand and respond to the risks caused by the climate-amplified exposures.
A smarter way to address physical climate risks
By evaluating the aggregate hazard scores of each of a company’s assets - the metric to evaluate the likelihood and potential impact of a specific hazard occurring — it is possible to understand their exposure to various natural catastrophes. Smart hazard scores can also combine historical data and predictive insights with expert judgment, providing the comprehensive risk assessments organisations need to address property damage and business interruption risks in today’s context.
More sophisticated risk evaluations will help to identify high-risk assets and prioritise actions to mitigate potential damage.
Organisations can better detect vulnerabilities, such as the presence of basements with critical equipment in buildings or plants in flood prone regions or identify secondary peril risks such as landslides following heavy rainfall with more precision.
A combination of traditional insurance, captives, alternative risk transfer (such as parametric solutions), as well as cost effective and sustainable adaptation on site level can help business operations or impacted value chains recover more quickly.
Using a combination of ‘what-if’ types of severe event scenario stress testing, risk engineering, and numerical or theoretical modelling can put companies on the front foot to manage the landscape of increasingly complex risks. The same is true of looking beyond an organisation’s boundaries to better assess the potential vulnerabilities across their value and supply chain in light of more frequent, more severe disruption due to climate change.
How to avoid under-insurance using analytics and valuations
Many businesses could be under or overestimating their property and business interruption risk in the context of heightened climate-related exposures. Some insurers, meanwhile, are potentially mispricing property risk, in part because their models don’t capture what used to be ‘black swan’ events – those events which are almost impossible to predict yet seemingly inevitable, after the fact. Once rare, such events are now much more common due to climate change.
Because many models call on claims experiences, they effectively play back what’s already known, rather than forecast future likelihoods and impacts. This can lead to underestimating the value of assets and subsequent underinsurance, leaving businesses vulnerable to significant financial losses in the event of a claim.
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