Insights from the Outsmarting Uncertainty webinar series
As the world heads towards global warming, potentially beyond two degrees by 2050, we’re already seeing greater volatility in weather-related natural catastrophe events, as well as an increase impact of chronic hazards, such as heat and cold stress. This is leading to increasing uncertainty in economic losses and insurability, as evidenced in our recent Natural Catastrophe review.
By better understanding and quantifying the true cost implications of climate-amplified natural catastrophe risks appropriately, your organization can better prepare for the risks. This may mean checking you’re not over-reliant or misinterpreting catastrophe risk models to ensure you avoid gaps in your organization’s protection.
This insight – based on an Outsmarting Uncertainty webinar on managing physical climate risks more effectively – looks at how you can better protect your business with smarter approaches to natural catastrophe modeling and a deeper understanding of climate-related secondary perils. We examine:
Some traditional models for quantifying natural catastrophe risk are leading businesses to potentially miscalculate or underestimate their exposure to extreme catastrophic events. Because of the lack of data and functionality limitations, traditional natural catastrophe modeling typically struggles to capture the wider financial impact due to external value chain interdependencies and operational disruption.
For example, during the 2021 flood event in Western Europe, water utility companies authorized water management interventions on several major rivers. This prevented catastrophic dam failure as part of the emergency response procedures for severe/low likelihood events, but increased the severity of flooding further downstream. We understand some private sector organizations did not factor these amplifying issues into their risk management and risk financing strategies, having based their decision-making predominantly on theoretical models and their own operational resilience.
Such cases illustrate the importance of moving away from relying solely on theoretical models and instead using a combination of ‘what-if’ severe event scenario stress testing, risk engineering and theoretical modeling that looks beyond organizational boundaries. Organizations should be prepared to review publicly available emergency response procedures of utility companies to enhance the modeled loss perspectives for flood risk of the theoretical models, to give one example.
Getting these wider perspectives can enhance your ability to understand, quantify and manage the impact of severe events that are becoming more frequent due to climate change. This may also involve revisiting recent and historic natural catastrophe events, claims histories and the lessons learned to better evaluate and scrutinize the theoretical models and their underlying uncertainties, potentially in collaboration with academic or other external partners where you don’t have the skills sets required internally.
Outsmarting natural catastrophe exposures exacerbated by climate change isn’t just about closing protection gaps. An evolved natural catastrophe modeling approach that’s bespoke to your organization and better reflects the potential impact of different climate scenarios, puts you in the driving seat of what you spend on protection. By moving away from using a single natural catastrophe model to a more nuanced, multi-method approach, you can optimize your risk spend.
That’s because a wider, clearer view on your risks will clarify what does and doesn’t represent good value on insurance markets. You’ll have better insight on questions like: Is my risk worse or better than my peers, and, if so, why? You’ll also know how you might better attract capital to your risk.
In a fragile insurance environment, evolving your modeling approach puts you in a much firmer position than those organizations that lack a clarified, data-driven view of their risks.
A ‘secondary’ peril is a natural hazard that typically leads to small or midsize damages compared with ‘primary’ perils, such as earthquakes or hurricanes. However, secondary perils, such as landslides following heavy rains or flooding, can often be as damaging as the primary events, meaning you need to factor these into how you assess your natural catastrophe risk.
In fact, we’re seeing more organizations needing to address how perils such as landslides can be triggered by primary events like earthquakes, floods and tsunamis. Such hazards introduce additional layers of risk that traditional catastrophe models often don’t capture.
For instance, a primary event like a heavy rainfall event may not only cause immediate structural damage but lead to landslides that block access routes, disrupt supply chains and prolong business interruptions. This can lead to further damage to the critical infrastructure you relying on, and hinder recovery efforts.
That’s why strengthening your physical climate risk resilience means incorporating scenario testing and stress testing beyond traditional catastrophe modeling to gain that crucial, more comprehensive view of your risk exposures, including the potential impacts of secondary perils.
By understanding these compounded threats, you can better prepare and build resilience, ensuring you can maintain operations even when you’re faced with complex and interconnected challenges.
To get ahead of natural catastrophe and physical climate risks today, we recommend you invest in scenario testing. By combining traditional catastrophe and climate analysis with additional stress testing, catastrophe risk engineering and scenario testing, you can get a more robust risk management view bases on a deeper understanding of your risk profile and impacts across your value chain.
In some cases, this can lead to the business prioritizing non-insurance risk mitigation controls and action plans such as business continuity plans, recovery plans and crisis management readiness, rather than relying on traditional insurance, to improve resilience.
Advanced modeling approaches can also help inform conversations with insurance markets, help you address coverage gaps and optimize decisions on risk financing and transfer. This could see you consider alternative risk transfer and parametric solutions, depending on your company’s risk tolerance, particularly when sufficient capacity is a challenge.
Risk managers looking to take a more strategic role can also leverage methodologies that quantify the current and future value of your company’s assets and explore how investors view your organization. Quantifying the financial impact of climate-related risks in this way can both help your organization better respond to climate risks and opportunities (while also potentially meeting certain climate disclosure requirements) and inform strategic conversations on the business’s future ability to achieve targets, realize organic growth and access capital.
To understand how to manage physical climate risks affecting the financial value of your organization, read our recent insight.
Discover a smarter way to manage the impact of physical climate risks on your property damage and business interruption exposures. Get in touch with our climate risk and industry specialists.
For more insight, watch the Outsmarting Uncertainty webinar series.
