As the world heads towards global warming, potentially beyond two degrees by 2050, we’re already seeing greater volatility in weather-related natural catastrophe events, as well as an increase impact of chronic hazards, such as heat and cold stress. This is leading to increasing uncertainty in economic losses and insurability, as evidenced in our recent Natural Catastrophe review.
By better understanding and quantifying the true cost implications of climate-amplified natural catastrophe risks appropriately, your organization can better prepare for the risks. This may mean checking you’re not over-reliant or misinterpreting catastrophe risk models to ensure you avoid gaps in your organization’s protection.
This insight – based on an Outsmarting Uncertainty webinar on managing physical climate risks more effectively – looks at how you can better protect your business with smarter approaches to natural catastrophe modeling and a deeper understanding of climate-related secondary perils. We examine:
Why traditional natural catastrophe models could leave your business exposed
Some traditional models for quantifying natural catastrophe risk are leading businesses to potentially miscalculate or underestimate their exposure to extreme catastrophic events. Because of the lack of data and functionality limitations, traditional natural catastrophe modeling typically struggles to capture the wider financial impact due to external value chain interdependencies and operational disruption.
For example, during the 2021 flood event in Western Europe, water utility companies authorized water management interventions on several major rivers. This prevented catastrophic dam failure as part of the emergency response procedures for severe/low likelihood events, but increased the severity of flooding further downstream. We understand some private sector organizations did not factor these amplifying issues into their risk management and risk financing strategies, having based their decision-making predominantly on theoretical models and their own operational resilience.
Such cases illustrate the importance of moving away from relying solely on theoretical models and instead using a combination of ‘what-if’ severe event scenario stress testing, risk engineering and theoretical modeling that looks beyond organizational boundaries. Organizations should be prepared to review publicly available emergency response procedures of utility companies to enhance the modeled loss perspectives for flood risk of the theoretical models, to give one example.
Getting these wider perspectives can enhance your ability to understand, quantify and manage the impact of severe events that are becoming more frequent due to climate change. This may also involve revisiting recent and historic natural catastrophe events, claims histories and the lessons learned to better evaluate and scrutinize the theoretical models and their underlying uncertainties, potentially in collaboration with academic or other external partners where you don’t have the skills sets required internally.
Smarter natural catastrophe modeling means harder-working risk spend
Outsmarting natural catastrophe exposures exacerbated by climate change isn’t just about closing protection gaps. An evolved natural catastrophe modeling approach that’s bespoke to your organization and better reflects the potential impact of different climate scenarios, puts you in the driving seat of what you spend on protection. By moving away from using a single natural catastrophe model to a more nuanced, multi-method approach, you can optimize your risk spend.
That’s because a wider, clearer view on your risks will clarify what does and doesn’t represent good value on insurance markets. You’ll have better insight on questions like: Is my risk worse or better than my peers, and, if so, why? You’ll also know how you might better attract capital to your risk.
In a fragile insurance environment, evolving your modeling approach puts you in a much firmer position than those organizations that lack a clarified, data-driven view of their risks.
Secondary perils and the amplifying effects of climate change
A ‘secondary’ peril is a natural hazard that typically leads to small or midsize damages compared with ‘primary’ perils, such as earthquakes or hurricanes. However, secondary perils, such as landslides following heavy rains or flooding, can often be as damaging as the primary events, meaning you need to factor these into how you assess your natural catastrophe risk.
In fact, we’re seeing more organizations needing to address how perils such as landslides can be triggered by primary events like earthquakes, floods and tsunamis. Such hazards introduce additional layers of risk that traditional catastrophe models often don’t capture.
