How climate change is shaping risk management

Late last year, Australia’s devastating bushfires underlined the growing threat of climate change risks. Climate change has exacerbated natural catastrophes over the past two decades, with more severe flooding, cyclones, and droughts across the Asia-Pacific region.

A new report from the Swiss Re Institute, Swiss Re’s think tank, underscores the growing impact of man-made natural disasters. According to the Institute, man-made natural catastrophes caused $9 billion in economic losses in the Asia-Pacific region last year.

Natural disasters have a disproportionate impact on the Asia-Pac region. Economic losses from natural catastrophes totalled $70 billion last year, from a global total of $137 billion. The main contributors in 2019 were Typhoons Hagibis and Faxai in Japan, and Australia’s wildfires.

According to the Swiss Re Institute, 55% of the growth in natural catastrophe losses is down to economic growth and rapid urbanisation in the Asia-Pacific region. 45% is down to climate change and other socio-economic factors. The report says climate change effects are most notable in “secondary perils” such as “rain-induced floods” and “record-high temperatures”.

Amid the ongoing Covid-19 crisis, insurance experts say it is more important than to maintain a focus on climate change risks.

Swiss Re’s APAC natural catastrophe manager Alex Pui believes there is an “upward trend of loss potential” with climate-change-related risks.

“If you look over a 20 year period, the first five years will look different to the last five years,” Pui says. “Natural catastrophes are becoming more severe over time. And APAC has one of the most exposed areas across the globe.”

What does the growing impact of climate risk mean for risk managers?

Pui believes Australia’s bushfires highlight the need for organisations to have a “holistic risk management” approach. He calls on risk managers to keep their focus on climate risks as well as the Covid crisis. “Just because Covid-19 has happened it doesn’t mean another typhoon won’t strike,” he says.

Alongside their devastating environmental impact, the Australian wildfires caused huge intangible losses, with business interruption and closures in major centres including Sydney. While larger cities in Australia have high insurance coverage, some regions across Asia-Pac are under-insured.

“In some developing countries you can see a protection gap between economic losses and insured losses that is very substantial,” says Pui. “Even in countries like Japan, where you would expect there to be more maturity, some companies are heavily uninsured against one of the prime perils in Japan, earthquakes.”

Risk managers can tackle climate change and natural catastrophe risks through risk mitigation as well as risk transfer. Innovative new products such as parametric insurance are expected to help organisations combat the threat of climate change risks.

Parametric insurance policies pay out when a natural event hits a predetermined threshold, such as a measurable increase in rainfall or reduction in river level. Andre Martin, Swiss Re Corporate Solutions’s head of innovative risk solutions in APAC, expects the product to provide comfort to risk managers and insurance buyers in exposed regions.

“Organisations can use parametric insurance to cover pure financial events, non-damage business losses. Pure economic losses are becoming more important,” Martin added.

As businesses become increasingly reliant on global supply chains and global demand, Martin believes they will become more tuned into risks outside of their home countries.

“Many companies have exposures through their global supply chains. Even if you are a company with an office in the centre of Singapore, you could be exposed to droughts in New Zealand, if that’s where your supplier is. Organisations need to think about where they are exposed to climate risks, even if your location is only moderately exposed.”

As climate change risks remain in 2020, risk managers will need to take a more global approach.