Authored by Lee Shavel — President and CEO, Verisk
When businesses assess risks, they often consider factors such as data breaches, operational disruption, compliance or reputational risk. Natural catastrophes aren’t likely at the top of the list, but inreasingly, extreme weather events are disrupting business operations and impacting the bottom line.
According to a recent report from Allianz Global Corporate & Specialty (AGCS), natural catastrophes are the largest driver of corporate insurance losses in the US. And with climate change increasing the frequency and severity of extreme weather events—such as hurricanes, floods, wildfires and heatwaves—businesses would be wise to consider these factors as part of their corporate planning and risk assessment.
The rise of disruptive events
Natural disasters will continue to pose a tremendous risk to corporations as recent events have shown the impact weather can have on business operations. Take the summer’s heatwaves as an example. Across Europe, extreme heat caused suspended flights due to runway damage, power and cloud-computing outages from overheated equipment and rail delays due to speed restrictions. The high temperatures are an emerging trend, not an anomaly. Our research shows that by 2050, heat stress is projected to impact 350 million people in the world’s largest cities.
In addition, the Atlantic experienced another busy hurricane season with 14 named storms, including eight hurricanes. Damage from hurricanes Ian and Nicole caused spikes in already-volatile material costs, impacting building and reconstruction costs across the country. Meanwhile, droughts affect agriculture and transport businesses, as seen in the recent disruption from low water levels in the Mississippi River. The costs of these types of disasters—in terms of both property damage and business interruption—are expected to escalate. Our analysis estimates that catastrophes will cause about $123 billion in global insured losses annually, compared to an average of $74 billion in actual losses over the past 10 years.
The expanding risk landscape
While certain areas of the country are prone to extreme events, such as tornadoes in the plain states and wildfires in California, regardless of where a business operates, there is a high probability an extreme event will impact it. According to a recent study from Research by Design, 90 percent of US counties experienced a weather disaster in the last decade.
Traditional regional weather risks are expanding. Hail risk is no longer limited to states considered “hail alley,” and tornado activity has been expanding eastward for several years. In 2022 alone, catastrophic flood events devastated inland areas of Kentucky, Missouri, southwest Virginia and even the Las Vegas Strip, locations not usually susceptible to flood risk. Typical risk “seasons” are also extending, as wildfires have become a yearlong concern due to warming trends, drought patterns and earlier snow melts in the west.
These trends require corporations to take a broader view of risks and assess the myriad ways perils may impact their business. For example, even a company with a largely remote workforce may experience productivity loss if a significant number of employees can’t work due to an extreme event in their respective area. That was the case during the Texas deep freeze in February 2021, when more than 4 million people lost power, many of them working from home during the height of the pandemic.
As weather risks grow in frequency and reach, corporate interests in these extreme events and building resilience to their effects should follow. Businesses should look to broaden their view of risk and expand existing business continuity and emergency management plans to consider their potential exposure to climate risks.
The insurance industry has been monitoring and developing mitigation strategies for years, leveraging a variety of data (including geospatial, property, structure, location, landscape and climate) and predictive analytic models to assess risks, estimate potential losses and inform resilience strategies.
Those strategies have the potential to help businesses and communities become more resilient to catastrophes by better understanding risks and promoting mitigation. One example of that has been the development of stronger building codes. In Florida, the structures that adhered to newer building codes fared much better during Hurricane Ian than those that didn’t follow current regulations.
As the effects of climate change continue to materialize—costing businesses financially and operationally—risk mitigation and resilience strategies will become paramount for corporations. And the insurance industry already has the blueprint.
Verisk (Nasdaq: VRSK) provides data-driven analytic insights and solutions for the insurance and energy industries. Through advanced data analytics, software, scientific research and deep industry knowledge, Verisk empowers customers to strengthen operating efficiency, improve underwriting and claims outcomes, combat fraud and make informed decisions about global issues, including climate change and extreme events as well as political and ESG topics.
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