Climate change is a risky business

By Stephanie de Groot, Senior Associate, MinterEllisonRuddWatts and Sam Ketley, Public Sector Practise Leader, Aon New Zealand.

In this article Aon and MinterEllisonRuddWatts combine their collective expertise and summarise the range of risks presented to businesses by climate change, how the insurance industry is responding to the risks and how they can be identified and managed for a successful future.

The science is clear – our climate is changing

Increases in the frequency and intensity of rainfall, droughts, storms, flooding and wildfires, temperature extremes, warmer oceans, melting of ice and snow and sea level rise – these are all predicted impacts of global warming, and they will only worsen and become more unpredictable as the planet warms.

These changes will have implications for every living thing on the planet and will directly affect business.

Not all businesses will be impacted equally

Some businesses, because of their nature or size, will be more or less impacted. For example, businesses that are particularly sensitive to a changing climate, such as horticulture and agriculture, will face increasing pressure to adapt, and will have a higher risk profile.

Small to medium sized organisations may also have a more complex path ahead to manage risk. They may not be subject to the same level of regulatory oversight and guidance driving change (i.e. they are unlikely to be captured by the proposed mandatory financial reporting obligations) and they may have a reduced capital and capacity to seize opportunities and adjust to a changing market.

The insurance industry is responding

In 2020 severe weather-related events globally resulted in USD97 billion of insured losses, 40% above the 21st Century Average. In New Zealand, these losses amounted to NZD248 million.

Losses associated with climatic events are being compounded by an increase in population and migration into urban areas which is increasing investment in infrastructure and built assets. This not only increases the inherent exposure to climate-related risks, it generally increases the demand for insurance capital and the protection gap where insurance capital is already constrained or unavailable.

The insurance industry is responding, not just to this up-tick in climate-related claims but the increasing risks associated with climate change and the demand for risk mitigation options. The insurance market has also recognised that it can influence positive change towards managing climate-related risks, not only by way of the industry’s own ESG policies and obligations but also by assisting businesses to assess and manage their increasing exposure to losses associated with climate change.

Questions are being asked of companies regarding delivery of their climate change impact reduction strategies and commitments. Insurers are looking to understand the risks to their portfolios and manage the potential for reduction of coverage in affected areas. Additional information is being requested from businesses about their exposure and mitigation to climate-related risk.

Exposure is not just limited to material damage and business interruption policies. Most insurance classes are likely to be impacted in some way by climate change, although the impacts have not been clearly defined yet, particularly where the risks are deemed long-tail (i.e. where claims may not arise for a number of years). However, one exception is with directors and officers (D&O) liability insurance.

D&O liability insurance is designed to provide protection to directors and officers for their personal liability resulting from claims made against them in the discharge of their duties on behalf of a company. Currently, a hard insurance market (i.e. an upswing in a market cycle with increased claims) is seeing premiums for this type of insurance increase and capacity decrease.

It is anticipated that as insurable events transition from ‘sudden and unforeseen’ to ‘known and likely to occur’ that certain coverages, and the availability of insurance capital, will reduce or even disappear.

Providing clear information to underwriters about the risks and potential impacts of climate change on your business, including a sustainability policy and climate change risk management plan, will help remove an element of uncertainty from the underwriting process, and assist in obtaining strong policy cover. If risks are not sufficiently mitigated, they may not be insurable or otherwise they are likely to result in a higher premium and/or reduced policy coverage.

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