“The string of natural catastrophes that wreaked havoc in 2008, costing the global economy $225 billion and leaving insurers with their second costliest year in history, graphically highlights the increasing risks to businesses of extreme weather events,” begins an article on the Lloyd’s web site (www.lloyds.com).
The end of the year has always been a natural time to sum up the major events that took place over the past 12 months. Lloyd’s summing up of some recent studies has produced an alarming picture of ever increasing global weather events that will have a major impact on the world’s insurers and reinsurers.
“Many companies are now grappling with the consequences of more frequent and more intense extreme weather events, such as hurricanes, tornadoes, floods and rainstorms,” said Lloyd’s.
As an example, January saw the heaviest rainfall in nearly a century to hit Queensland, Australia. The resulting heavy flooding to major coal mines disrupted production for months, pushed up the global price for coking coal and cost insurers billions of dollars.
“That the two most expensive years for insurers on record, according to research by Swiss Re, should come during the last four again spurs debate: is climate change already having an effect on our weather? Lloyd’s asked.
“Whether the recent higher tropical cyclone activity is the result of climate change is the source of much controversy within the scientific community,” Professor Bill McGuire, Director of the Aon Benfield UCL Hazard Research Centre, acknowledged.
The article continues as follows:
Global warming at work
The fact that out of a total insured catastrophe bill of $50 billion—the highest after 2005’s record year—storms account for the lion’s share, costing the industry $39 billion, is evidence for some scientists and underwriters that global warming is already at work.
They cite the fact that the ten warmest years ever-recorded have all occurred in the last 12 years (with 2008 the tenth-warmest) according to the World Meteorological Organization, and point to initial forecasts warning of another unusually active hurricane season this year as proof that climate change is already occurring.
“2008 fits in well with the trend of ever-increasing losses from natural catastrophes,” Ernst Rauch, Head of Munich Re’s Corporate Climate Center, observed. Statistics show a sharp rise in catastrophe-related insurance losses over the past two decades.
“We can clearly see that the driver behind these increased losses is weather-related events: rainstorms, hurricanes, tornadoes and flooding. The number of geological events, such as earthquakes and volcanic eruptions, and the losses resulting from them has remained flat over the last five decades,” Rauch stated.
“Even if we adjust historical events for inflation, or if we go further into socio-economic changes, such as shifts in wealth and population, there is still a residual trend that cannot be explained simply by socio-economic factors,” he continued.
“We can identify from our data an increasing number and size of weather-related events, so to us it is obvious and logical that climate change is one of the drivers behind increasing losses from natural catastrophes over the past few decades,” Rauch concluded.
Warm weather phase
But other scientists and insurers argue that the recent spate of costly natural catastrophes is part of the current warm weather phase that has increased sea surface temperatures in the Atlantic. The resulting higher hurricane activity may be explained as being part of a natural variability that occurs in the global climate over the course of several decades.
“Tropical cyclone losses—or any weather-related losses in general—are linked to climate, which is simply defined as the weather averaged over 30 years,” David Bresch, Head of Sustainability and Emerging Risk at Swiss Re, explained.
For Bresch the rise in insured losses from natural catastrophes since the 1970s is mainly driven by the growth in insured values and the increased exposure in catastrophe-prone regions, such as Florida coastal areas.
“During any such period you will see quite a lot of variability in weather: the first decade you may not have many cyclones, the next decade you may see a lot, while the third phase may see an average number,” he noted. “So 2008’s high activity—and 2009’s forecast for further high activity—compared to the lack of activity in 2006 and 2007 can be explained in terms of climate variability”.
“Climate change is a fact. But in many regions there is not yet enough evidence to attribute local extremes of weather to global warming,” Bresch added.
Businesses need to act immediately
Although there is no consensus among insurers and scientists over whether the recent string of natural disasters are a definite signal of climate change, they all agree that climate change will occur and warn businesses to act immediately to protect themselves from an increased frequency and intensity of natural disasters.
A recent study by Swiss Re with the Swiss Federal Institute of Technology shows that claims are forecast to steadily increase due to more frequent and intense winter storms in Europe, ultimately rising by between 16 percent and 68 percent over the period 1975 to 2085.
Meanwhile, Lloyd’s report ‘Rapid Climate Change’ (November 2006) highlights the possibility of climate change taking place this century at a faster pace than expected, with flood and drought risk particularly exacerbated. Companies must therefore reduce their vulnerability to catastrophes as well as reducing their carbon footprints to prevent global warming from escalating.
“There’s no point in saying just because we can’t turn back the clock we should give up,” McGuire stated. “We have to act now otherwise climate change will be even worse than it is currently forecast to be.”
Many companies are already taking big strides to make themselves carbon neutral, but some may be failing to plan for the effects of climate change in their risk management strategies.
“As severe weather events become more frequent then risk managers are taking account of them in their plans,” Paul Hopkin, Technical Director at AIRMIC, the British risk management organization, indicated.
Measures taken to adapt to more extreme weather events can effectively reduce the risk of prolonged outages to firms’ key facilities.
“They are paying more attention to preventing losses from occurring. They’re looking at how their buildings are constructed and maintained, as well as other issues such as simply keeping the drains clear to prevent flooding,” Hopkin noted.
Risk managers’ questions
Insurance has played an important role in providing protection to firms against the vagaries of the weather. “Insurance, particularly reinsurance, has, in the past, been key in absorbing huge risks that go across national borders. It has helped economies to rebuild themselves quickly after a big catastrophe,” Swiss Re’s Bresch stated.
Firms must ensure they have enough coverage to protect themselves from a prolonged period of lost business as a result of a heavy flood or devastating storm.
“Risk managers are asking themselves whether they have sufficient business interruption in place. They are looking more closely now at how long it will take to get a severely damaged building back in service. Will a basic 12- month indemnity be sufficient?” Hopkin asked.
While the question of whether global warming is already occurring remains hotly debated, there is no dispute that businesses are increasingly vulnerable to extreme weather events and must adapt and plan for the imminent effects of climate change.
For most it already entails cutting their carbon emissions, and many now also need to review their risk management plans to take account of more frequent and more extreme weather events. But some firms may need to go further, and even rethink their business models.
“Increasing warm or cold snaps can ruin clothes retailers’ plans and will require utility firms to rethink demand for their product,” Hopkin noted.
As the truth about climate change unfolds, it therefore seems that climate change—and those responsible for managing it within the organization—are set to play an increasing role, not only in determining corporate risk management strategy but also in building a sustainable business model for the future.
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