- Climate change is contributing to rising losses from natural disasters, including increased damage to physical assets and disruption to business operations.
- But an underreported driver of losses is the growing number and value of exposed properties, such as those in floodplains.
- Organizations should set a baseline of risk to understand how natural disasters can impact existing assets and supply chains, and build resilience on that basis.
Climate science is a fast-evolving field of study, and while projections of future environmental outcomes remain uncertain, the need for investments in long-term resilience strategies has never been clearer. A multifaceted approach to climate action focuses not only on reducing carbon emissions and transitioning to renewable energy sources, but also on ensuring that individual entities prepare for and adapt to what lies ahead.
Many of the dangerous and costly manifestations of climate change are already here. Rising temperatures create conditions that are more conducive to a higher frequency or severity — or both — of many natural perils, creating the potential for increased damage to physical assets and disruption to business operations.
Climate scientists have a high degree of confidence that for perils such as extreme heat, flooding and wildfires, warming temperatures are making catastrophic events more likely.
For example, researchers estimate that the rainfall that caused catastrophic flooding in Texas in the wake of Hurricane Harvey in 2017, went from approximately a 2,000-year event in 1900, to a 300-year event in the present day, to a projected 100-year event by the end of this century.
But for other perils — tornadoes, hurricanes, and other windstorms— the impact is less clear. Many scientists believe that climate change may reduce the overall occurrence of tropical cyclones, but increase the frequency of the most intense ones and the total precipitation from all storms. The net impact is complex and region-dependent.
Tempting as it may be to blame disasters on climate change, there is natural variability when it comes to extreme events, and the degree to which they are impacted by warming temperatures is apparent for some perils but not established for others. The science of event attribution, a relatively new discipline, aims to address such questions.
It’s more than climate change causing losses
It is also important to note that some of the major events of recent years are not out of the ordinary if we take a long view. If the 1926 Miami hurricane struck today, it would cause an estimated $300 billion in damage and untold loss of life. Likewise, a repetition of the 1923 Great Kanto earthquake in the Tokyo area would cause an estimated $1.5 trillion in property damage today — far higher than any recent earthquake.
When we think about the damage from recent natural disasters, it is important to place climate change in the wider context of what is contributing to rising losses. The much more certain driver of risk, which surpasses the impact of climate, is the dramatic increase in the number and value of properties over the past decades, especially in areas of high risk.
As populations have migrated to cities and coasts, more homes and businesses are built in areas prone to flooding, on inland floodplains, and in the wildland-urban interface where wildfire risk is greatest.
A recent study published in the journal Nature Climate estimated that the number of people exposed to flooding in the US is expected to double over the next 30 years, primarily due to population growth, which is expected to far exceed the impact of climate change.
That is not to downplay the impact of climate change, but to point out that much of the phenomenon of rising losses from natural perils is governed by where people choose to live and build. It is not solely at the whim of chaotic atmospheric dynamics. This means that a significant portion of the risk can be managed through mitigation, adaptation, and policy.
Modeling and mitigating the harm
The insurance industry has been preparing for big losses using catastrophe modeling for more than three decades now. These models — available for a wide range of perils, including storms, earthquakes, wildfires, and floods — provide a data-driven view of risk, based on the latest scientific understanding of the likelihood, location, and severity of extreme events and their impact.
Insurers and reinsurers use modeling tools to understand the potential for losses, and, in recent years, climate change has entered the discourse about catastrophe modeling in the insurance industry in a big way.
One concern is that the historical data used to simulate potential events reflect past conditions that are no longer applicable. To create a forward-looking view, modelers more carefully utilize the range of historical data used in model development to better represent the current conditions and the effects of climate change that have already occurred. As the risk evolves, the models are updated to incorporate the latest research and data, ensuring a view of risk that reflects the near-term climate within a 10-year time frame.
What’s the World Economic Forum doing about climate change?
There are clear steps that individual organizations can take today to decrease the potential for losses from extreme events.
First is understanding that increasing development in hazardous areas and swelling property values are also responsible for the historical rise in losses. Second is acknowledging and preparing for the fact that climate change will inevitably continue to increase losses in the future, and that a certain amount of climate change is already “baked in” to the system.
To both these points, current modeling tools — which have a long-established track record of helping the insurance industry prepare for natural disasters before they occur — can be used now to establish a baseline of risk to today’s assets.
Organizations can model a variety of perils to understand the risk to existing assets and supply chains, formulate strategies to protect them through insurance or physical mitigation, and plan resilient growth strategies for future assets. Models can also be used to sensitivity test the implemented protection measures against future climate conditions and a comprehensive range of high impact scenarios.
Climate change is dominating conversations across all sectors of the economy. While much of the focus is on a future state that’s decades away, modeling tools make it possible to assess the risk of a near-present climate state.
It is crucial for organizations to recognize what their baseline is to make it possible to understand how it may shift in the years to come and create the best strategies for adaptation.
This article previously appeared in the World Economic Forum.