’There is no doubt that climate change increases volatility, frequency and also severity,’ says senior director of product management

2023 was the fourth year in succession that global insured losses from natural catastrophes breached the $100bn barrier. This volume of nat cat losses is now the norm rather than the exception, as is the breaking of climate records – which are being rewritten on an annual basis.

According to the EU’s Copernicus Climate Change Service, the global mean temperature rose to 1.48°C above the pre-industrial average in 2023, surpassing the previous record.

Seven months of the year marked their highest temperatures on record, while global sea-surface temperatures were at record monthly highs from April through December.

In Europe, northern Italy faced an unprecedented hailstorm and several countries were hit by severe wildfires. The Panama Canal experienced its worst drought since it opened in 1914, leading to major global shipping disruptions. Meanwhile, flooding caused destruction globally, with notable events in Slovenia, the US and China.

In the UK, home insurance claims for weather-related damage reached a record £573m last year, according to the Association of British Insurers (ABI).

This was over 36% higher than in 2022, when the total was £421m, with the rise largely fuelled a succession of storms – including Babet, Ciaran and Debi.

Maurizio Savina, senior director of product management at Moody’s RMS, said: “Climate change is a trend leading to more extreme events and an increase in the range of events we are observing, which is particularly evident for perils like flood and wildfire.

”There is no doubt that climate change increases volatility, frequency and also severity. However, what we observed in the recent years is not due to climate change only.”

According to Moody’s RMS, the observed increase in frequency and severity of nat cat events is compounded by issues such as change in land use and land cover, urbanisation and concentration of risk in areas such as floodplains.

These issues are increased by economic inflation, which is particularly important for both construction materials and specialised manpower.

Prioritising resilience

Gabrielle Durisch, global head of sustainability solutions at Allianz Commercial, said: “Nat cat events, particularly those related to weather and climate, are expected to increase and therefore they will have an impact on the insurance industry, from model updates to pricing and underwriting strategies.

”Resilience and business continuity plans must be prioritised.

“Climate change-related litigation is on the rise and is likely to become a significant source of liability exposure for companies and their directors in coming years. The directors’ and officers’ (D&O) insurance market has already seen claims related to climate change.

“California wildfires in 2018, for example, sparked climate change-related securities class action lawsuits. Companies increasingly face the prospect of litigation from activist shareholders seeking to influence company policy or compensation for alleged damage related to past pollution.”

Other potential exposures comes from claims of “greenwashing” or “climate-washing” litigation, where a company is sued by investors for unsubstantiated or misleading ESG claims, or the failure to match net zero commitments with action.

In addition, environmental factors are also beginning to affect product liability and construction claims. Extreme weather and unpredictable seasonal variations in climate could affect the quality and performance of building design and materials as the consequences of climate change intensify.

Boardroom focus

According to Allianz, climate change is already a top boardroom issue, as companies face an array of physical and liability-related risks from a more extreme climate and from the transition to a low- or no-carbon economy.

The insurer said that businesses are also seeking protection and financing mechanisms to address the growing climate insurance protection gap, while boosting supply chain resilience is expected to be a key area of focus for this year and beyond.

Torolf Hamm, senior director for physical risk at WTW’s climate practice, said: “In the wake of climate change, we are seeing many clients in the private sector already facing more volatility around their property and business interruption risks to do with natural catastrophes and climate.

”This is leading to substantial challenges for risk managers in how they run and finance their portfolio of risks.

“In addition, many companies are currently undergoing a fast-tracked, often disruptive transition to the low carbon economy, driving rapid changes to their organisation’s risk profile and value chain, which need to be factored in by risk managers. On the flipside, the transition of course also provides significant opportunities.”

WTW said that there were a number of key considerations that brokers should take on board when supporting clients in their response to the increasing frequency and severity of extreme weather events.

These include the need to secure insurance in areas where climate change is already having a material impact, coupled with a drive to close the protection gap from natural disasters, that comes with a human and economic cost and continues to grow due to a changing climate.

Hamm concluded: “Adapting a company’s risk financing strategy to reflect the ‘new normal’, including the climate risk vulnerabilities for its operations and supply chain, is critical because climate is a risk issue that needs to be baked in for any strategy to be sustainable and support success over the long term.

“With climate regulatory risks having an increasing impact on credit ratings, risk managers will also need to factor this into financial decision-making, as well as preparing their portfolios for the climate transition by divesting certain risky assets.”