Tackling climate risk

Last year, FM Global’s survey of 300 CEOs and CFOs across North America, the EU and Asia Pacific found that 76% of respondents acknowledged that their business was exposed to climate risk. For 86% of CEOs and CFOs, addressing climate risk was considered a high to medium priority, while 82% felt that their firms had limited or no control over the adverse impacts of climate risk.

These findings are revealing because, provided appropriate action is taken, the majority of climate-related property losses are preventable, in contrast to respondents’ perceptions.

The time to act is now

The recent IPCC report notes that, due to factors such as water, pollution, extreme heat and general vulnerability to climate change, 99 of the 100 most risk-prone cities in the world are located in Asia.

In corroboration with these findings, between 2014 and 2017, Asia Pacific experienced more natural disasters than anywhere else in the world, suffering 55 earthquakes, 217 storms and cyclones and 236 cases of severe flooding, according to a United Nations’ Global Humanitarian Overview 2019 report.

This trend has continued during the pandemic. In 2021, there was flooding in Jakarta, Kedah and Penang in Malaysia and Thailand and an earthquake in Melbourne.

According to the World Meteorological Organization, in 2020, floods and storms affected approximately 50m people in Asia. In the same period, tropical cyclones, floods and droughts induced an estimated average annual loss of several hundred billion dollars, said the report, citing United Nations Economic and Social Commission for Asia and the Pacific. Losses were estimated at approximately $238bn in China, $87bn in India and $83bn in Japan.

These and other sober statistics are increasing shareholders’ and investors’ awareness of climate risk. As a result, addressing climate risk is increasingly a priority for risk managers, boards of directors and shareholders who recognise the urgent need to close the insurance protection gap and build greater climate resilience into existing property and infrastructure.

It is also clear that companies should no longer underestimate the impact a changing climate can have on their property. It is essential that companies plan for the potential impact and make the appropriate investments to reduce any effect on their operations.

Insurance is not enough

As awareness of the impact of a changing climate increases, businesses and property owners should keep in mind the following: It is unlikely that insurance will fully cover the financial impact of a loss.

Insurers are less willing to offer extensive property coverage for businesses that have not demonstrated that their facilities are well protected. It is increasingly difficult for a business to cover most of the risks through an insurance policy alone. For insurers, a McKinsey report published at the end of 2020 suggests that the property insurance sector will have to evolve significantly to cope with climate impacts.

For insureds, buffering the risk with insurance is just the first important layer. On top of this, companies should, in any case, develop a long-term risk-mitigation strategy to deal with climate risk.

Whether it is relocating critical production equipment, installing wind-resistant roofs, or incorporating new site-selection criteria, such measures inevitably require investments that some companies are still reluctant to finance, either because of a lack of knowledge about the effects of a changing climate on their operations or because they are afraid of incurring expenses that may prove unnecessary. However, these measures may turn out to be critical in determining the severity of the risk impact.

Retrofitting existing buildings can make them more resilient and prevent possible damage, but sometimes these modifications are so complex to implement in older buildings, or so costly, that it may be more appropriate to build new facilities in less-exposed locations.

It is then necessary to identify climate risks from the start, in order to factor the risks from the very beginning – at the design phase of the building. To do this, architectural firms and companies should work closely together to design buildings that meet current needs while integrating the potential aggravation of certain risks in the years to come.

Deciding whether to spend on retrofitting and renovating to build resilience can be difficult, but there is one certainty which should sway companies into action - the investment will lead to high quality buildings that minimise disruptions to business operations.

Increasing climate resilience can be overwhelming and may seem like an insurmountable challenge with a lot of uncertainties. For business decision makers, climate risk presents a choice between resilience and disruption. By opting for resilience, business leaders can proactively address the growing impact of climate change, significantly reduce the exposure to business disruption and enhance the prospects of business across this climate-prone region.

These actions could result in one certainty that can persuade companies to take action – that building up resilience can ensure that some, if not most climate-related losses can be prevented. 

This article first appeared in Asia Insurance Review