Counting the cost of catastrophes with climate change

Of the top 10 global catastrophes examined between 1970 and 2019, storms accounted for approximately $521 billion in global economic losses while floods accounted for about $115 billion.

Against the backdrop of recent ‘once in 1,000’ year rainfall induced flash floods in Henan, China, and devastating floods in Germany and Belgium, businesses around the world are under increasing pressure to disclose their exposure to physical climate risk. While it is widely accepted that the increasing frequency and severity of climate catastrophes are expected to translate to increased economic losses, historical temporal trends have not proved conclusive, and the sensitivity of this relationship largely speculative. 

New research which estimates the sensitivity of economic losses to climate change (by linking the catastrophe economic loss to the local temperature) suggests that economics losses are associated with increasing temperatures i.e. a 15% economic loss corresponds to a per degree Celsius in temperature increase. Hence, this raises the prospect of developing an index projection of economic losses in a warmer world.

The relationship between temperature and storm intensity

Increasing economic losses from intensifying storm events with climate change are largely a result of the increased moisture holding capacity of the atmosphere. As every degree increase in temperature translates to the atmosphere holding 6-7% more moisture, if all this extra moisture is converted to rainfall, more intense storms and increased economic losses with climate change can be expected. Even greater increases are projected due to further storm intensification leading to increased flooding. However, the loss potential from weaker events is not expected to increase to the same extent, as part of the moisture from increased storm intensities will be absorbed by the ground or detained in man-made impoundments.

Why is identifying a climate change signal in economic losses challenging?

We are already seeing increases in the frequency and intensity of extreme rainfalls because of climate change. While these increases are only expected to continue in line with human-induced climate change trajectories, attributing increases in economic loss to climate change has proven to be challenging. On the one hand, factors such inflation, increasing populations, and economic growth could result in the same future storm causing a greater economic loss. On the other, better disaster defences and emergency preparedness mean that economic losses may not be as large as they would have been in the past. Hence, the continuing debate on whether historical economic losses have increased because of climate change.

Overcoming methodological and data challenges

Given that temperature is the heat-induced driver of rainfall severity, the local temperatures during a catastrophe will modulate the severity of the catastrophe. With significant evidence that higher local temperatures are associated with greater storm and flood severity, this paves the way forward to enable linking the temperature that is causing the catastrophe directly to the economic loss.

Increases in economic loss due to higher temperatures

By linking the catastrophic economic loss on a per event basis to its local temperature and standardising the catastrophe economic loss by GDP, this allows for comparison between catastrophes originating from different countries and enables comparison over time. 

Our research found a median catastrophe economic loss sensitivity to temperature (as a fraction of GDP) of 8.8%/°C for the US and 2.6%/°C  for the rest of the world. Commensurate with more extreme storm events being more likely to intensify due to increasing temperatures, a 15%/°C sensitivity was found for the largest catastrophes. A sensitivity of catastrophic economic loss temperature of 4%/°C for floods was found due to the weaker loss potential of flood related perils as compared to storms. 

What do these results mean for the future?

Hurricanes, typhoons, and cyclones, which cause the greatest economic loss, originate in parts of the world where temperatures are warmer. With the tropical expansion bringing increased tropical cyclone activity poleward and increased temperatures increasing the moisture holding capacity of the atmosphere, our findings point to the expected magnitude of greater economic losses due to shifts to more destructive weather types coupled with increasing storm severity. This could provide a basis for reporting tomorrow’s changes in economic loss based on associations with the projected temperature from global climate models, helping policy makers, communities, and businesses alike to prepare and invest in mitigation measures today.

What do the findings mean for corporates?

While the results of the study cannot be directly linked to an assessment of physical climate risk impacts at an individual corporate level, they reveal implications to the broader economy that may adversely impact operating conditions for corporates. For example, persistent upwards trends in economic losses will have a significant knock-on effect on the insurability of extreme weather events stemming from business disruption and damage to a growing urban property portfolios. Given the increasingly hyper-connected world and intricate supply chain networks, it is also not unfathomable that extreme weather events in localized areas may reverberate across the world, akin to the 2011 Thai Floods and recent Taiwan drought leading to widespread chip shortages.

To know how you can quantify the impact of physical climate risk, learn more about Climate Risk Solutions for Corporates.

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