Taking informed action in response to climate change

Following years of extreme weather events, climate change is near the top of most political and corporate agendas. However, if the world is to realize the ambition of the Paris Climate Agreement to limit global warming to 1.5°C, huge strategic and behavioral changes are required from governments, companies and individuals. And they must be done quickly.

Companies rarely have the processes and tools – from the strategic level down to individual locations or among business-critical systems – to assess the potential impact of a changing climate. They need to develop structured processes to understand the risks and explore solutions relevant to their operations.

Relying on insurer expertise

The tools and processes used by the insurance industry to assess weather risks today have uses that go far beyond insurance. They can be used in an array of methods to develop climate change-related impact assessment - not least by linking development and climate scenarios. Specifically, to evaluate the influence of risk management options on risk transfer solutions analysed both using in-house expertise and tools as well as linking them up with latest scientific understanding and modelling.

The insurance industry’s toolbox includes analyses of the effects of climate change risks across various classes of risk. For example, insurers are tracking the impact of climate change-related litigation and regulations on directors’ and officers’ exposures, and are working with customers on insuring new technologies, such as renewables, hydrogen power and carbon capture and sequestration.

Insurers’ response to Hurricane Andrew, one of the costliest U.S. hurricanes when it left widespread destruction in 1992, shows how their expertise contributes to better catastrophe risk management. In particular, the storm hastened growth of the catastrophe modelling industry, which today is an integral part of the (re)insurance industry’s business model and is used to evaluate and price natural catastrophe risk as well as inform decisions around risk appetite and reinsurance purchasing.

Catastrophe models are an important tool used in the (re)insurance industry to price natural catastrophe risks and can be used to study the potential impact of various climate change scenarios on assets. The models use exposure and hazard data to estimate damage and financial loss for specific scenarios relative to a geographical location - a powerful hurricane making landfall in the U.S. or a flood in Europe or Asia, for example. These models can also be adapted to help foresee potential future climate change scenarios in lieu of those produced by “conventional” models based on historical events – informed by latest science and the data and models openly provided.

Tools that do not directly consider the effects of climate change, such as those based primarily on historical data, are still effective in managing the risk. Hazard maps, building codes and others can be used, for instance, to develop climate change-related loss scenarios or consider the disruption that events could cause to business operations. Any analysis and decision-making based on such resources must, however, consider the uncertainties and level of confidence in the various layers of data they use, whether it is related to climate change, infrastructure, supplier locations or financial metrics.

A formal risk assessment process breaks down a problem and addresses specific exposures one at a time. By using available tools and data in a structured process, companies can identify the most critical assets and value chains that need protecting and prioritise these areas for further analysis and risk management actions. For example, if a critical manufacturing plant or facility is identified at a strategic level, this could trigger a risk assessment at a more granular site-specific level.

Steps for risk managers

The first step for a risk manager is - together with their insurer - to refine the data that defines the organization’s value chain. In other words, the data linked to the assets, suppliers, critical products, revenues and profits, and employees at each location. The second step is to source climate data relevant to the scope of the risk assessment exercise. This data should consider climate change scenarios in the wider economic development context, relevant perils and geography. Risk managers then need to connect the dots, developing scenarios and a catalogue of solutions, also by linking up in-house models with methods to understand the Economics of Climate Adaptation. Constant monitoring of these scenarios on the scientific and solutions on the market side is important to ensure they are suitable for a changing risk landscape.

Climate change impacts all of society, not just corporations, and a holistic view of the risk is essential. Scenarios, therefore, should consider multiple climate-related triggers such as increasing temperatures and more frequent windstorms, among others. The risks associated with changes in technology, market and consumer trends, and regulations (so-called transition risks) must also be considered. And, the impact of climate change on the corporation’s services and the performance of its products are also considerations. Liabilities can arise not only when a company’s activities contribute to climate change, but also in the event that their products and services do so.

Resilience services

The insurance industry can share data, tools, knowledge and processes that will help customers on their sustainability journey. With this in mind, Zurich launched a dedicated risk management advisory service to help businesses adapt to the rapidly changing risk landscape. Zurich Climate Resilience at Zurich Resilience Solutions, provides corporate customers with comprehensive solutions to identify, assess, mitigate and adapt to current and future climate risks.

The ambition of providing services and solutions beyond traditional risk transfer is helping corporate customers establish frameworks to assess climate-change related risks and solutions, as well as develop scenarios and models for their businesses. Customers are shown how their data can be used for multiple analyses within their organizations, including sustainability reporting, adaptation strategies, adaptation plans, design of supply chains, refinement of business continuity plans, selection of sites for new projects and design of resilient buildings.

No time to waste

Climate change cannot be solved by a single report or analysis. Tackling the issue will require an iterative process, continually adapting the data, tools and science used in the analysis to consider changing science and government policy, and breaking down the problem and engaging in dialog to develop solutions. Decision makers need to understand the Economics of Climate Adaptation, to figure what basket of adaptation options is best suited to strengthen societal resilience. The clock is ticking, and companies can no longer afford to wait for solutions to emerge. Tools and data are available now to determine what climate change will mean for their businesses and help make plans.

Zurich aims to be a long-term strategic partner, sharing our expertise to assess risks and stimulate conversations on risks and solutions.

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Originally published on Commercial Risk Online on November 16 2021