For a decade or more, the business case for companies to effectively manage their exposures to the myriad risks that accompany a warming planet has been growing increasingly clear. Leveraging digital tools to better understand climate risk and its interplay with other risk factors can boost our ability to manage today’s threats — and get out ahead of the threats of tomorrow.
Swiss Re has long taken a keen interest in helping clients understand the destructive consequences of a changing climate and how to protect themselves against it. We identified climate change as a threat back in 1979 and spent the subsequent four-and-a-half decades analyzing and responding to its powerful effects on society and our industry.
Over the years, the challenge of understanding climate and nature-related risks has grown more complex. It’s easy to see why when you view things through the lens of current events. Soaring inflation fanned by the pandemic and war in Ukraine, population growth in areas vulnerable to extreme weather, and a fragmenting geopolitical landscape are just a few of the risk factors we continue to face, and all of them intersect with climate change in both overt and subtle ways.
This combination contributes to rising natural catastrophe losses. Here’s one example: some scientists suggest hail-laden convective storms may increase in frequency with climate change. Should more frequent hailstorms damage assets in an inflationary environment like the one we’re now experiencing, that drives replacement costs higher. This phenomenon is playing out in real-time: In 2022, as inflation spiked, insurers reported big increases in hail claims.
Unfortunately, however, many companies, regardless of the geographies in which they operate, still lack the risk-detection infrastructure and analytical tools that are becoming increasingly necessary to gather and analyze the growing volumes of risk data about such interconnected risks, leaving them ill-prepared.
I’m not saying that changing this is easy. Risk data is dispersed, it’s sometimes contradictory, and it is proliferating at a scorching pace. Still, it’s a challenge we must get a handle on if we are to succeed in seeing the full complexity of the dynamic risk landscape in front of us to make informed decisions on the path forward to mitigate threats.
Corporates must take control of their climate risk exposure to guide strategic decision-making. As threats intensify, decisionmakers today must develop a far broader risk vision than they had in the past, to avoid concentrating valuable assets in areas with vulnerability to natural perils. Such information is essential for policymakers, too, as they decide how their communities should grow.
Similarly, financial institutions wanting to grow residential or commercial lending portfolios can also benefit. A volatile climate, coupled with rising building and construction materials costs, means they must gather as much information as possible about the full universe of potential threats to avoid unwittingly concentrating their risks.
International banks may require borrowers to meet certain sustainability criteria for loans or bond issuances. In numerous countries including Europe, companies and their subsidiaries are also facing heightened requirements for reporting their climate-related risks. Moreover, companies seeking to raise investor interest at home or abroad may choose to highlight their climate-related exposures. Investors may also demand it.
The vastness and diversity of these challenges demands digital solutions to accurately gather and analyze data about interconnected risks, so we can put it to work in the service of resilience.
Digital solutions fuel better understanding also of how an event might disrupt business operations or supply chains today — or how a factory or distribution center could be impacted by natural and other catastrophes 15, 20, or 25 years from now, including for global companies whose far-flung assets face vulnerabilities that vary by geography.
Visualizing interconnected risks
At Swiss Re, we aim to help global companies visualize interconnected risks across the breadth of their organizations.
One example is our “Climate Risk Score Framework” which allows firms to assess their exposure to climate risks and, most importantly, to act on them.
We are also making Swiss Re analytical models available to corporates through our Risk Data & Services platforms, which allows risk managers to create digital twins and run risk scenarios on their key assets to better understand their vulnerabilities to climate change.
Thus equipped, companies can steer their business activities with confidence, while avoiding unwarranted exposure to hazards whose potential costs are growing at rates not seen in decades. The alternative is, quite frankly, unacceptable, since we know insufficient access to valuable risk insights leaves people vulnerable.
What is true for the private sector also holds for public entities seeking to benefit from digitalizing risk data. For instance, Swiss Re has partnered with New York City on a pilot project to support communities whose vulnerability was apparent when Hurricane Sandy hit in 2011. Qualifying lower-income households will be able to tap emergency cash assistance when their need is greatest.
For decades, global insured losses from natural catastrophes have been growing at an average 5-7% annual rate. In the first half of 2023, overall economic losses from natural catastrophes amounted to USD 120 billion, 46% above the ten-year average. And only USD 50 billion of these losses were insured. The protection gap remains enormous.
For instance, when torrential rain in 2021 destroyed centuries-old German towns, less than half of the country’s households had protection. Similarly, only about half of Hurricane Ian’s USD 100 million total economic loss last year was covered by insurance.
But consider this: While Ian was a powerful storm, it still fell squarely on the spectrum of what can be expected in virtually any hurricane season. Instead, Ian’s shocking price tag resulted from its landfall in urbanizing Florida, where population growth, accumulation of valuable assets and inflation combined to exacerbate risks posed by extreme weather. And less than a year later, portions of the state are yet again in recovery mode, after Hurricane Idalia hit in late August.
Interconnected risks like these make it imperative we take full advantage of new digital tools to better understand and manage our growing exposures, steer decision-making and drive much-needed progress on closing the protection gap. If we get it right, this can help us manage the risks of today and make good decisions about the evolving threats of the future.
Visit the Swiss Re Corporate Solutions website to learn more about our climate risk solutions.