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FEATURE l CLIMATE CHANGE PLANS
“Contractors are often hard to come
by [after a catastrophic storm] and materials can be in short supply, which leads to a facility not getting up as quickly. Ultimately, if the facility isn’t running, it is not producing goods and contributing to the bottom line.”
nies to gain expertise in simple actions that can lessen the damage brought by climate risks and natural disasters.”
Shifting attitudes in recent years means that the presence or absence of a climate plan is coming to be seen as a reputational risk issue. By not having one, companies risk being shunned by consumers who demand greater corpo- rate social responsibility; and hence, the creation of CSR divisions.
For companies responding to climate change risk, money is a factor. Climate change is creating financial risk, either because of the cost to repair damage after a severe storm, or because of the costs as- sociated with environmental regulation.
In addition, property and casualty insurers will argue that if we’re seeing more extreme weather events that don’t match historical weather patterns, then potentially their pricing will now be in- accurate because they’re underestimat- ing the risk.
Over the past decade, the industry has been paying more than $1 billion each year to repair catastrophic damage related to storm damage. Many insurers do not see that as being sustainable over the long term.
“They might have to change their business model,” Nelson says of P&C in- surers. “They may end up in a situation in which they can’t charge high enough premiums to cover certain risks. Insur- ers may no longer be able to just increase premiums to cover their risk. They may need to reassess their business model and if it’s still viable in a world of in- creased risk.”
For businesses, the damage caused by climate-related events is increasingly widespread, making the road to rebuild- ing longer and more expensive. Demand surge, for example, can increase the cost of repairs. “Contractors are often hard to come by [after a catastrophic storm] and materials can be in short supply, which leads to a facility not getting up as quickly,” Klosowski says. “Ultimately, if the facility isn’t running, it is not producing goods and contributing to the bottom line.”
This leads to supply chain risk. Even if one facility is knocked out, that can create a break in the global supply chain, thanks to the way companies are interconnected. “Even if your facility is not impacted, one of your supplier’s or customer’s may be,” Klosowski says. “This can bring business to a standstill, and a loss of revenue.”
The increased frequency and severity of climate-related disasters is playing a role in quickening the pace of risk mitigation efforts. Things could move even faster and get more complicated “if governments and society decide that action will be taken to prevent the temperature from increasing substantially,” Nelson says. “Then new rules might be introduced.”
She advises risk managers to careful- ly plot out their next steps, including an assessment of how the company’s cli- mate change plan aligns with what ex- perts expect of the climate 20 years from now. This is not a case of using past in- dicators to predict future performance.
“We need to understand what will happen in 20 years’ time,” Nelson says. “The costs won’t be the same in 20 years
as they were 20 years ago. Does the business strategy still fit the environ- ment into which we are moving?”
It all boils down to how a business perceives the danger, Klosowski says. “Some organizations think it’s too ex- pensive to engineer against natural di- sasters; others realize it’s much more expensive not to.”
Klosowski identifies three aspects to developing a proper risk plan.
First, understand the possible events. “That gets down to understanding the footprint of what might be damaged,” she says. “Could there be widespread damage beyond the site? Having an un- derstanding of the risk enables the risk manager to: 1) harden their facilities against the hazard, and then 2) craft comprehensive business continuity plans.”
If there are multiple locations, risk managers will need to calculate the ag- gregate exposure of a single event. “For example, hurricanes like Irma, Harvey and Florence travelled through multiple states dumping tons of water that led to flooding,” Klosowski says.
Finally, understand the interdepen- dencies to help construct a risk mitiga- tion plan. For example, are you ship- ping to one of your own facilities, or to a customer’s? Is your own supply chain affected by a climate-related loss? Or is it a third party’s supply chain?
One impediment to coming up with a detailed climate change plan is that companies are having a hard time as- sessing where they stand on climate risk, according to GARP. Different com- panies are at different levels of matu- rity in the process. Since there are few benchmarks, companies may believe their plans are strong but untested.
The best advice Nelson can give right now: Do something. Don’t sit around and wait until you have all the answers. Moving ahead and figuring things out as you go is better than stalling.
“This is a relatively new topic for many and my advice for them would be to just start,” she says. “The questions should still be embedded in their day-to- day risk management processes. No one has all the answers today.”
42 September 2019 | Canadian Underwriter