By Thomas Varney, Allianz Global Corporate & Specialty
For the past year and a half, the insurance industry has focused most of their attention on mitigating COVID risk and disruption while the dramatic consequences of climate change receded in the background of public perception. As natural catastrophes caused by climate change such as wildfires and hurricanes continue to become more frequent and severe, more demands are being placed on risk management and underwriting.
Natural catastrophes and climate change both ranked in the bottom five in the the 2021 Allianz Risk Barometer, which identifies the top global business risks based on the insights of more than 2,700 risk management experts from 92 countries and territories. This fact is concerning given that the consequences of climate change have long been visible: This year alone, the Pacific Northwest had record-breaking heatwaves and Texas was faced with a record-breaking winter storm, reminding us of the extent of the damage that can occur due to raising temperatures.
According to respondents to the Allianz Risk Barometer, physical losses are the biggest risk that climate change poses to companies worldwide, followed by disrupted supply chains and operations.
Business continuity management in focus
Other extreme weather events, such as the flood disaster in parts of New Jersey and New York caused by Hurricane Ida in early September 2021, has become a wakeup call for insurers to place new demands on companies’ risk management. The severe damage shows that businesses outside major hazard zones can now also be affected by massive flooding. There is no doubt that the floods have also brought a company’s overall business continuity management into sharper focus. Risk engineers recommend that all establishments in these situations use early warning systems and develop a flood contingency plan to reduce potential losses and be adequately prepared for extreme events.
Specifically, the plan should include clear responsibilities in the event of an emergencyand incorporate lists of damage restoration companies, supply engineering companies and machine manufacturers. It should be clear where important goods, equipment or documents can be moved as quickly as possible in the event of a flood and what alternative access routes might look like. Temporary alternative options for production, either in-house or via contract manufacturing by external providers, should also be considered.
Business continuity planning for such crisis events – and floods are just one scenario among several here – must be prepared in advance and revised regularly. Time and again, companies that have such a plan in place and have also practiced it across operations will have a significant speed advantage in being able to quickly resume operations. Companies that demonstrate sound risk management concepts for precautionary measures will also have advantages when purchasing insurance coverage.
Anticipate future loss trends as best as possible in the value proposition
Although the exact consequences of climate change are difficult to assess due to the lack of comparable histories, insurers should still take action. The increase in severe weather events can also lead to higher loss costs. A distinction must be made between the increase in the loss per risk/insured and the increased accumulation risk when several larger regions are affected by extreme weather events. Another headache for actuaries is the high volatility of such loss events and the fact that for some natural events, such as drought, there are still no or only less reliable models.
The significant challenge for insurers is to appropriately assess, price and manage in the portfolio the changing weather and catastrophe risks due to climate change. To do this, insurers need to continue to invest in data-based underwriting and portfolio management and review pricing approaches, but also continuously leverage innovative technology and capabilities. Ultimately, it is about anticipating future claims trends as best as possible, which improves advisory services and supports clients in loss assessment and prevention. In borderline areas of insurability, alternative risk transfer concepts can also help smooth out the volatility of extreme events.
Climate change is one of the most challenging problems that humanity has ever faced. The latest catastrophe reports on weather extremes around the globe should be a wake-up call to insurers and their corporate clients, and preparing for these inevitable events will be greatly beneficial for all parties involved when the moment comes.
Thomas Varney is an ARC regional manager at Allianz Global Corporate & Specialty.
