Companies called on to disclose natural disaster risks

Companies should be required to report on and disclose their natural disaster risks as a standard procedure, according to leaders speaking at a United Nations summit hosted by the International Insurance Society (IIS) and organised by Willis Group in London today.

The summit, held in London to coincide with the IIS international seminar this week, is the culmination of four years of collaboration between private and financial sectors and the UN Office for Disaster Reduction (UNISDR). Insurance and reinsurance broker Willis has taken a lead in driving the initiative forwards and assisted by facilitating the summit today.

Dominic Casserley of Willis Group addressed the audience on how the insurance sector is helping to reduce the human, social and financial cost of natural disasters. “Disaster risk is playing a greater part in human life than ever before,” he said, “and it is driven by demographics, economic development and climate change. Increasingly violent and frequent weather events are affecting communities and businesses, particularly in urban areas with ever more dense populations. The UN’s global assessment of risk from disasters showed direct losses of $2.5 trillion this century. And at a private sector level, these risks are material for many companies, leading to concerns about the future and less confidence to invest and create jobs. As an industry, we have got much smarter about understanding, pricing and sharing risk and this expertise gives us the power to respond to these greater threats.”

The call for companies to disclose their natural disaster risks is a forward-thinking measure which would naturally result in a greater need for insurance and reinsurance capacity. Today, many of the world’s largest companies do not disclose their exposure to natural catastrophes or weather disasters, so are not encouraged to fully protect themselves against these risks.

If a global standard process for natural disaster hazard disclosure was developed it could result in significant opportunity for the reinsurance market as well as capital market investors providing insurance-linked securities capital. The coverage needs of large companies around the world, particularly those operating in multiple countries and regions exposed to catastrophes could be enormous.

Investors in the world’s largest companies may be surprised if the companies they allocate capital to suddenly disclosed just how large their exposures are. For example the supply chain exposures to natural catastrophe risks, of industries such as the manufacture of cars, computers, microchips and other commodity goods are vast. The risk capital required to protect against these natural disaster exposures could be equally as vast.

Casserley explained; “This is also about investment. Investors want access to meaningful information that allows them to make informed judgments about a business. Yet some of today’s most important risks are completely absent from their mindsets. Better disclosure of the real risks that businesses face will lead to improved valuations and pricing for capital, with the better returns that implies. Stronger companies translate in to stronger communities, building new resilience for society against what is an increasingly risky world.”

UNISDR, the World Bank and the IIS, were among those who also added their support to the UN’s agenda on natural disaster risk disclosure.

Elizabeth Longworth, UNISDR director, told delegates at the summit; “The business case for disaster risk reduction has been well made by many people here, not least the Prince of Wales. The private sector has never been more engaged in the work of the UN Office for Disaster Risk Reduction and this meeting today, and the proposals which will come from it, will help to ensure the integration of the business sector and financial system into the priorities for action contained in the post-2015 framework for disaster risk reduction.”

The UN has been a strong proponent of the needs for countries and companies to take responsibility for disaster risk reduction and as part of that taking responsibility for financially securing themselves against disaster and natural catastrophe risks. The movement pushing this initiative forwards is growing in strength and consensus all the time and the insurance, reinsurance and ILS markets should also be looking on this initiative as a way to help the world become more disaster resilient while also seeing it as an opportunity to advance the development of new risk transfer markets.

This call for corporate natural disaster risk disclosure sits very well alongside our earlier article on the growing costs of climate change to the economy and why companies need to protect themselves against the growing climate and weather threat.

Corporations and companies have roles to play in being responsible world citizens, both in the way they do business, but also in the way they protect their businesses, their employees and the input they make to economies. That means these risks need risk transfer and risk capital to provide that, and that is where the re/insurance and capital markets come in.