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Keeping businesses running in the face of natural catastrophes

The concept of business interruption was redefined in 2020. Until the pandemic hit, many companies’ continuity plans existed only on paper – certainly when it came to disruption of the scale the crisis has caused.

COVID-19 has demonstrated how global events beyond companies’ control can rapidly change the business landscape. Right now, the world might still be focused on dealing with the immediate impacts of the virus, but the risk of dramatic upheaval isn’t restricted to the pandemic. Disruptions due to climate change could be far deeper and longer lasting.

With COVID-19 driving a renewed appreciation of business risk, companies must take control of all the tools available to them to ensure their operations can continue – no matter what challenges they face.

More extreme weather conditions, more of the time

The Swiss Re Institute Natural Catastrophe sigma shows just how worried we should be about the encroaching challenges of climate change. 

It is not just a hotter planet with more extremes of wet and dry weather that we are facing. We must also plan for secondary perils – events such as severe convective storms, wildfires and flooding – which are occurring more often and becoming more severe. Taken in isolation, the cost of these events can be absorbed. But added together, they start to take their toll – and they can be hard to insure against.

Unlike primary perils such as tropical cyclones, these secondary perils can hit any part of the world. And they are harder to predict.

It is likely that these localised events are becoming more frequent and severe in part due to climate change. But there are also human-driven causes, such as demographic shifts and increasing global interdependence. And then there is increased urbanisation and sprawl into high-risk areas, which puts more infrastructure under threat.

As an example, like many emerging markets in Asia, China continues to undergo rapid urbanisation and, as a result, economic assets accumulate. In June 2020, the worst flooding along the Yangtze River for decades occurred, killing hundreds of people, destroying cropland, and testing the limits of the Three Gorges Dam. Insured losses were more than USD 2 billion, the second costliest flood event ever in Asia.

Exposure to these risks is real and mounting, whether it is your own business nationally or spread across multiple locations, or through the reach of your supply chain.

And much of this risk is currently uninsured: the gap between what was lost and what was covered by insurance was USD 113 billion in 2020, up from USD 87 billion in 2019 – yet this was below the 10-year average of USD 143 bn.

Keeping on the front foot

Renewed appreciation at board level of the risk of supply chain disruption and business interruptions combined with a hard market provides new impetus to prepare for climate change challenges. No one will be immune to either the physical or economic impacts

As always, having visibility of the risks in your own business as well as the exposure of your supply chain is a vital first step. But the evolving nature of natural catastrophe risk calls for an agile response. It also means taking a longer-term view of risk across both your own and your suppliers’ businesses.

Rising to these challenges will mean embracing cutting-edge tools and technologies.
This includes better measuring and monitoring, pulling on internal and external data to build a detailed and bespoke picture of your own risks. This will help to bring a degree of predictability to the future.

Reconfiguring risk

In this heightened and evolving risk environment, businesses and the insurance industry will also need to work together to find solutions. These should encompass risk transfer, risk insights and risk partnerships. For example, getting the best understanding of geo risk requires insurers to source the latest and most relevant data, but it also requires greater transparency from corporations over their supply chain exposure. 

Technology is making it easier than ever to understand the risks posed by events such as natural catastrophes, and plan accordingly. COVID-19 has driven the insurance industry to accelerate its use of digital tools to help clients build resilience. This should be part of the information risk managers harness for the best chance of keeping business running uninterrupted. 

For example, Swiss Re’s web browser-based CatNet® tool assesses geo risks by combining hazard, loss, exposure and insurance information with selected background maps and satellite imagery. Risk managers can use maps and data about climate change, catastrophic event impact, population density and more to support their daily work.  

But the insurance industry must keep innovating and developing the tools that can help their customers stay ahead of ever-changing Nat Cat risks. 

The pandemic can be a wake-up call for all corporations on how they manage risk. When it comes to business continuity planning, climate change risks are no longer on the horizon – they are here now, and they affect us all.

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