introduction
The increasing frequency and ferocity of major climate events and natural disasters has brought the discussion of climate change to the forefront of governments and businesses. Drought, floods, wildfires, earthquakes and volcanic eruptions, among other weather-related natural disasters, can damage buildings, bridges, roads and dams. Tropical cyclones can disrupt fossil fuel drilling operations in the Gulf of Mexico, while the reliability of renewable energy sources, such as solar and wind, is entirely dependent on weather conditions to function, but can also be negatively affected by extreme weather events. An unprecedented storm or disaster could shut down airports, trains, and electrical power grids, putting national security and economic stability at risk.
Governments are responding with stricter climate disclosure laws and imposing other mitigation steps. For their part, companies are taking action to protect their assets from climate-related damage and litigation. Insurers are adjusting their policies and withdrawing from some areas hit hard by losses to protect their bottom lines but they are also using new technology to obtain more accurate data and streamline the claims process.
Global business risks
- Building developments take flexibility into account
Owners and developers are becoming more attuned to the location, design factors and building materials used to secure structures. They are also reviewing mitigation strategies. For example, California recently approved construction of new hospitals with three days' worth of water tanks and their own power generators to keep the sites running at full capacity in the event of a major disaster. Construction companies are increasingly taking into account the root causes of climate change, as well as its impacts – for example, looking at emissions control, the use of solar panels and stormwater management. They also review their policies, procedures or strategies in anticipation of changes in the regulatory environment. - New laws and regulations in the field of climate change
In the United States, the Inflation Control Act will provide nearly $400 billion over the next decade to reduce carbon emissions and lower the cost of clean energy technologies, but it also includes aspects of trade protectionism that could lead to backlash from European countries. In addition, the US Securities and Exchange Commission has proposed rules that increase corporate climate reporting requirements. At the state level, California has passed two groundbreaking climate bills. One requires companies with more than $1 billion in annual revenue that operate in the state to annually report their emissions. The second requires U.S. companies doing business in California with annual revenues of more than $500 million to disclose climate-related financial risks and what they are doing to mitigate those risks.Europe and the UK have already passed strong climate disclosure rules. British regulations require corporate disclosures to explain how climate change is addressed in corporate governance; and its effects on the company's strategy; How to deal with climate-related risks and opportunities; Performance measures and goals.
While some climate change regulations and agreements may be beneficial for highly developed countries, they may hinder some emerging economies.
- Catastrophic destruction and losses will lead to more disputes and lawsuits
In the aftermath of a catastrophic weather event or natural disaster, resolving potential disputes over property damage, causation, quantification of impact costs and other insurance claims will result in lawsuits, liability, and costs in defending situations.
Global business opportunities
- Major companies are reviewing their insurance files
In fact, some larger companies are self-insuring. Their incentive is to keep operations running and get their own facilities back online quickly, rather than to file an insurance claim. These companies have become passionate about developing technologies that can address climate risks and build highly resilient supply chains. - Green design
Many structures now have to incorporate “green designs” that have a minimal impact on the surrounding environment. In India, for example, hospitals are required to have their own microgrids to support power and operations in the event of a storm or natural disaster that cuts the facility off from the main power grids. The adoption of this technology has begun in the United States. - Rehabilitation of existing facilities
More companies are reviewing their structures to see if they should be retrofitted to withstand extreme weather conditions and natural disasters or build entirely new facilities. This is especially important for companies that provide disaster services, that is, those that deliver goods in emergency situations and cannot afford any “down” time. It is also essential for small businesses that need to build facilities in one area, in the event of a disaster in another area. - Retain weather experts
There is a trend toward companies hiring forensic meteorologists to mitigate climate-related disasters and gain a competitive advantage, especially when gathering information for an insurance claim or lawsuit. Storm reports may not contain accurate information for the exact project location. Professional meteorologists who recognize the inherent problem with reporting procedures can compile and interpret storm data for applicability and accuracy.
- Technology is changing the insurance claims process
Companies use pre-loss and post-loss techniques to reduce the cost of the insurance claims process. An example of the former is monitoring via early warning systems. Post-loss technology can include ground-penetrating radar, drones, satellite imagery, and even remotely operated underwater vehicles to see the extent of damage following an extreme weather event or natural disaster.Insurers use automated claims processing to quickly review and evaluate claims and reduce the time it takes to settle them. Insurance companies are also using mobile reporting that allows customers to report claims and submit photos and videos of damages for faster processing.
(Source: UNDRR Report: The Human Cost of Disasters: An Overview of the Past 20 Years (2000-2019) / Center for Research on Disaster Epidemiology (CRED) Emergency Events Database (EMDAT))
(Source: World Meteorological Organization Atlas of Deaths and Economic Losses from Weather, Climate and Water-Related Hazards)
(Source: UNDRR report: The human cost of disasters: an overview of the past 20 years (2000-2019) / Center for Research on Disaster Epidemiology (CRED) Emergency Event Database (EMDAT))
Top takeaways
1. Aging infrastructure makes society more vulnerable to the increasing severity and frequency of extreme weather events in the United States, as well as in many other developed and developing countries.
2. As more major weather events cause catastrophic damage, insurance companies are adjusting their policies by offering higher premiums, deductibles, and other fees, while redefining contractual terms.
3. Insurers are also putting the onus on the insured to prepare for severe weather events, with more technology, such as satellite imagery, being used to speed up the claims process.