By Lee Shavel — President and CEO, Verisk
When companies assess risk, they often consider factors such as data breaches, operational disruptions, compliance or reputational risk. Natural disasters probably aren’t at the top of the list, but extreme weather conditions are increasingly disrupting business operations and affecting the bottom line.
According to a recent report by Allianz Global Corporate & Specialty (AGCS), natural disasters 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 heat waves—businesses would be wise to consider these factors as part of their corporate planning and risk assessment.
An increase in devastating events
Natural disasters will continue to pose a huge threat to corporations as recent events have shown the impact weather can have on business. Let’s take the summer heat for example. Across Europe, the extreme heat caused flight cancellations due to runway damage, power and cloud outages due to overheating equipment, and rail delays due to speed limits. High temperatures are an emerging trend, not an anomaly. Our research shows that by 2050, heat stress is predicted to affect 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, affecting construction and reconstruction costs across the country. Meanwhile, droughts are affecting agriculture and transportation, as seen in recent disruption due to low water levels in the Mississippi River. The costs of these types of disasters – in terms of 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.
An expanding risk landscape
While certain areas of the country are prone to extreme events, such as tornadoes in the plains states and wildfires in California, no matter where a company operates, there is a high probability that an extreme event will affect it. According to a recent study by Research by Design, 90 percent of U.S. counties experienced a weather disaster in the past decade.
Traditional regional weather risks are spreading. The risk of hail is no longer limited to states considered “hail alley,” and tornado activity has been spreading eastward for several years. In 2022 alone, catastrophic flooding devastated inland areas of Kentucky, Missouri, southwestern Virginia, and even the Las Vegas Strip, places not typically susceptible to flood risk. Typical risk “seasons” are also lengthening, as wildfires have become a year-round concern due to warming trends, drought patterns and earlier snowmelt in the West.
These trends require corporations to take a broader view of risk and assess the myriad ways that hazards can affect their business. For example, even a company with a largely remote workforce may experience a loss of productivity if a significant number of employees are unable to work due to an extreme event in their area. That was the case during Texas’ deep freeze in February 2021, when more than 4 million people were without power, many of whom were 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 seek to broaden their view of risk and extend existing business continuity and emergency management plans to account for their potential exposure to climate risks.
The insurance industry has been monitoring and developing mitigation strategies for years, using a variety of data (including geospatial data, property, structure, location, landscape and climate) and predictive analytics models to assess risk, estimate potential losses and inform resilience strategies.
These strategies have the potential to help businesses and communities become more resilient to disasters by better understanding risk and promoting mitigation. One example of this was the development of stronger building codes. In Florida, structures that followed the newer building codes fared much better during Hurricane Ian than those that did not.
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 a blueprint.
Verisk (Nasdaq: VRSK) provides analytical insights and data-driven solutions for the insurance and energy industries. Through advanced data analytics, software, scientific research and deep industry knowledge, Verisk empowers clients to strengthen operational efficiency, improve insurance and claims outcomes, fight fraud and make informed decisions about global issues, including climate change and extreme events, as well as political and ESG topics.