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AGCS Briefing Highlights Increasing Financial Impact of Weather Events

  • Insured losses from weather events as a proportion of global GDP increased by 327% between 1974-1983 and 2004-2013. 0.018% to 0.077%.

  • Loss potential exacerbated by rapid urbanization – particularly across Asia – and greater interconnectedness of the global economy, resulting in increasing contingent business interruption (CBI) and supply chain exposures.

  • Companies need to spend more time examining their potential CBI/supply chain risk exposure. Interdependencies between suppliers is often a big unknown. Only 50% of businesses have alternate suppliers, according to AGCS.

Allianz Global Corporate & Specialty (AGCS) recently brought together risk managers from FTSE 100 institutions and other major corporations in London to discuss the global challenges posed by the impact of climate change, the rapid pace of urbanization and increasingly more complex production processes.

Their findings concluded that multinational businesses need to place increasing emphasis on reviewing pre-loss and post-loss risk management in order to mitigate the impact of increasing financial losses from weather-related catastrophes, driven in part by climate change.

Changes in the climate and weather patterns have the potential to affect extreme weather events around the world, manifested in three primary ways – more intense windstorms, incidences of heavy rainfall leading to flooding events and more severe drought episodes. For example, eight of the 10 largest historical flood losses have occurred in the past 13 years causing over $100bn in economic damages.

Risk managers were also briefed that the loss potential for global businesses from such events will be exacerbated by additional risk factors such as rapid urbanization – particularly in Asia -  and the greater interconnectedness of the global economy, resulting in increasing contingent business interruption (CBI) and supply chain exposures.

By 2070 it is projected that all but two of the top 10 global cities ranked by assets exposure to coastal flooding will be in Asia, including four in China alone. Six years ago the top 10 list was comprised of cities in the US, Netherlands and Japan.

If natural catastrophe risk management procedures are not in place or have not been regularly reviewed, the magnitude of losses from weather-related events can increase significantly, according to AGCS.

For example, adequate coverage of CBI and supply chain risk exposures remains a gap in many multinationals’ insurance programs.  

“Companies need to spend more time examining their potential CBI/supply chain risk exposure. They put a lot of time into assessing direct damage and looking at their own business interruption (BI) impact but probably not as much as they should do in terms of the risks associated with supplies and customers,” said AGCS Regional Head of Claims, Martin Henson.

Interdependencies between suppliers are often a big unknown and it is estimated that only 50% of businesses have alternate suppliers, according to AGCS.

Henson; Dr Rebecca Mitchell, Head of Emerging Markets, UK Met Office; Charles Whitmore, Managing Director and Head of Property Solutions Group, EMEA at reinsurance broker Guy Carpenter; Clive Trencher, Senior Risk Consultant, AGCS; and Dan Tomlinson, Managing Director at Allianz Risk Transfer all gave presentations to risk managers from a number of FTSE 100 institutions at the AGCS weather risk event.

“Even with a one degree change in temperature we are already into a position of an increased level of risk of more extreme weather events such as heatwaves, droughts and floods,” said Dr Mitchell.

“How we go about adapting as a society to these sorts of potential futures is something we will need to consider and it is also something businesses will need to consider over shorter and longer timeframes.”

To view the full version of this article, as well as AGCS’s pre- and post-loss natural catastrophe risk management plans click here.