Companies are increasingly looking for new ways to mitigate and manage climate risks, and the demand for alternative tools and strategies to help them reduce property losses and adapt to a changing climate is increasing.
The need for support comes when companies face increasing pressure from regulators, investors, credit rating agencies, employees and customers to reveal their climate change risks and how they intend to manage them, say industry experts.
Society is beginning to grapple with the effects of climate change on the frequency and severity of natural disasters, “whether it’s increasing forest fires in California, shipping patterns in severe storms or changing behavior for hurricane events,”; said Liz Henderson, co-director of America’s disaster risk analysis for Aon PLC in Chicago.
The increased awareness is driving an increased demand for climate risk analyzes and technologies from insurance companies, she said.
The insurance industry is seen as a critical component in responding to climate risks, says David Sherwood, a Stamford, Connecticut-based CEO at Deloitte & Touche LLP.
But necessity is the mother of invention, and “it is not until we have events like COVID or climate that they become catalysts for the need to reinvent or think differently,” he said.
Early warning indicators, faster damage support after an event and drones are some of the innovative areas in which insurance companies work to reduce climate risks.
“As we learn more about the nature of these risks, insurers may need to consider in the future how they can stimulate the underlying policy” to encourage policyholders to take proactive measures to mitigate climate-related risks, Sherwood said.
Large global companies in the retail, real estate and manufacturing sectors show the greatest interest in services to reduce climate risks, says Adam Hurley, Head of Real Estate Risk Technology for Zurich North America. “Large global retailers have distribution channels, material suppliers, anything that can drive some of these risks. They also tend to have outlets everywhere, so the risk is widespread,” he said.
Zurich models future climate change scenarios to provide its customers with a “forward-looking lens” for managing risks, said Mr. Hurley. It also helps policyholders manage risks when switching to cleaner energy, either by adding solar panels or other technology. “We want to make sure they do not take risks while trying to be more sustainable as a company,” he said.
More organizations are installing solar panels on the roof or walls of a building and adding insulation when they appear to be energy efficient, says Katherine Klosowski, vice president and director of natural hazards and structural engineering, for FM Global in Johnston, Rhode Island.
Such technology can add risks. Solar panels can increase a manufacturer’s exposure to fire, hail and windstorms, while extra insulation can increase the risk of fire. It takes some thought, engineering and knowledge to mitigate these risks, Klosowski said.
“Customers make many of these changes to be a sustainable organization, which means that their organization will not have a major impact on the environment. We want to work with them to ensure that their organization is also resilient, which means that the environment does not will have a major impact on their organization, “said Klosowski.
Many companies, including insurance companies, are collaborating on climate risk analysis initiatives to improve their climate data and modeling capabilities. For example, in January, the rating agency S&P Global acquired The Climate Service Inc., a startup based in Durham, North Carolina.
The Climate Service models and analyzes both physical risks and transition risks globally, says CEO James McMahon. The analysis aims to help companies as car manufacturers make long-term strategic planning and decisions on capital allocation by better understanding how the climate will change and affect supply and demand and production, he said.
It is also intended to provide insight into how risks change so that a manufacturer can work with its risk transfer provider to ensure that it adequately hedges and transfers risks, McMahon said.
“With the global perspective, we can look at mutual risk dependencies in the supply chain,” said Steven Bullock, global head of ESG Innovation and Solutions, S&P Global Sustainable1, in London.
For the car sector, there is a huge opportunity in the transition to a low-carbon economy, to understand the role that electric vehicles can play and the net benefit they can produce in different places, said Mr. Bullock.
There is also a growing interest from insurance companies, as well as banks and other industries, to model the impact that climate change may have on asset allocation in their investment portfolios, says Matthew Lightwood, Head of Risk Solutions, at Conning Inc. in Cologne, Germany.
With Conning’s cloud-based climate risk analyzer, companies can present a specific climate scenario, such as a temperature change that occurs over the next 20 years, and model the future impact on their portfolio’s market value, Lightwood said.