WTW calls for fresh approach to manage physical climate risks
Climate change is significantly amplifying property damage and business interruption exposures, and these require smarter, more dynamic and comprehensive approaches to understanding and responding to the risks, according to WTW.
The broker said the complex and amplified exposures are due to the increasing frequency and severity of natural catastrophe events such as floods, wildfires and storms, which are often exacerbated by climate change. WTW recently held an ‘Outsmarting Uncertainty’ webinar on managing physical climate risks more effectively.
WTW noted that last year, natural catastrophes caused more than $350bn in economic losses globally, with insurance covering less than a third of these losses at just over $100bn. And between January and June 2024, the US experienced more than $30bn in insurance claims due to an above-average number of tornadoes, hailstorms and straight-line wind events.
According to WTW, the damages involved in these events often far exceeded businesses’ risk scenario-planning considerations. Torolf Hamm, senior director, physical climate risk, climate practice, WTW, said: “By evaluating each of your assets’ aggregate hazard scores – the metric to evaluate the likelihood and potential impact of a specific hazard occurring – you can understand their exposure to various natural catastrophes. Smart hazard scores can also combine historical data and predictive insights with expert judgment, providing the comprehensive risk assessments that organisations need to address property damage and business interruption risks in today’s context.”
He said more sophisticated risk evaluations will help you identify high-risk assets and prioritise actions to mitigate potential damage, while a combination of traditional insurance, captives, alternative risk transfer, such as parametric solutions, as well as cost-effective and sustainable adaptation on site level, can help operations or impacted value chain recover more quickly.
He recommended using a combination of severe event scenario stress testing, risk engineering, and numerical and theoretical modelling. And he warned that many businesses could be under or over-estimating their property and business interruption risk in the context of heightened climate-related exposures.
He said a focus on claims experience can lead to under-estimating the value of assets and subsequent underinsurance. Instead, firms should use analytical tools that can cover a wide range of hazards, such as drought, fire, heat stress, precipitation, flood, sea-level rise and tropical cyclones, allowing for the evaluation of current conditions, as well as future time horizons and different climate scenarios.
