Common goals tie risk management with sustainability strategies

Sustainability is a perfect fit for risk management, as both share the aim of protecting people, property and the environment, said Xavier Mutzig, Group Insurance and Insurable Risk Director at multinational chemical company Johnson Matthey PLC. He was among the participants discussing how risk managers should confront climate risks and other sustainability issues during a session at Zurich’s recent Global Risk Management Summit in Switzerland.

“Sustainability and risk management have a lot in common, particularly starting from the same objective of protecting people and the world, because what we do in risk management is prevent accidents,” said Mutzig.

Both sustainability and risk management have short and long-term time horizons, he said, a practice that helps reveal emerging risks. “We are forward-looking, so we are quite aligned.”

Mutzig said Johnson Matthey developed its first sustainability program in 2007 and in 2021 developed a comprehensive list of sustainability goals that addressed three areas: delivering products and services that help customers decarbonize, how to decarbonize the company’s own operations and protect people.

As with risk management, sustainability is about doing the right thing, Mutzig said. Adhering to corporate ethics and protecting the organization’s reputation are also a common thread, he added.

Lagging awareness is boosted by storytelling

Because insurers and risk managers are focused on the conventional risks associated with their operations, it can be difficult to increase awareness of natural hazards and climate change related risks within an organization, said Amar Rahman, Global Head Climate Resilience at Zurich Resilience Solutions.

“We find stories very powerful” as a tool for raising awareness, Rahman said. To illustrate, he showed attendees a video of flooding at a production facility that was triggered by lightning during a rainstorm. When power went out, the municipality’s pumping facility couldn’t pump the water away and the plant suffered flood damage.

Problems at the site that contributed to the flooding included the elevation difference between the facility and the main road. “When you have nothing to pump that water out, it’s going to come back through the drainage system,” Rahman pointed out. And, the plant was in an area that had become highly urbanized in recent years without associated upgrade of infrastructure to handle the growth, he added.

It was the first time such an incident had occurred there, an often-heard fact at sites where property is damaged by natural causes, Rahman said. “History is not a good indicator of what could happen in the future. And these kinds of things you don’t find in the data, you don’t find on a hazard map, you don’t find anywhere. So, you need a lot of imagination – based on experience of events happening in other regions – to develop the story.”

A key component in analyzing a location to reveal such exposures is to understand the value chain, according to Rahman. “By the value chain, I mean your suppliers, workforce, the infrastructure, stock” and other considerations, he said.

“Fundamentally, it’s a risk management approach. You identify the risks, you assess the risks, you quantify them and do something about it,” Rahman explained. “And you monitor how the risks and adaptation measures change with time.

Finding the pain points

In most cases, insureds think first of the hazards that could threaten them. They want to know whether they are in a flood zone, are at high risk for wind damage or susceptible to other natural threats, Rahman said.

“But that is one dimension of risk only,” he said. “Our approach is to look at the exposures, i.e. “pain points” in the value chain. Because you need to protect these pain points from wind, flood, fire or an explosion.”

After identifying the pain points, the next step is to consider what could happen if they are hit by a natural disaster event, Rahman said. “And then we look at the controls around these pain points.”

Having good data makes the process easier, Rahman said. Getting it means speaking individually to each stakeholder to understand their perception of risk and the data they have that could help manage sustainability risks, he added.

The question of uninsurability 

As the frequency and severity of weather events increases, will there at some point be areas that are uninsurable? That’s unlikely, according to Joffre Mishall, Head of Property U.S. National Accounts at Zurich North America.   

“We’re always going to assess exposure,” Mishall said. “We’re always going to be able to apply some type of capacity as long as we can appropriately price.”   

Major insurers “are going to be able to help out somehow” to cover the threat of natural disasters, Mishall said. “Now, will that capacity be enough to cover your entire exposure? It may not, but it might be enough to make emergency repairs to get you by and enable you to operate.”   

“I think there will always be capacity,” Mishall said. But it may not be as much as buyers would like and will likely be expensive in high-exposure areas, he added.