Extreme weather events are regarded as the second most prevalent threat to global stability in terms of likelihood, following interstate conflict with regional consequences, according to analysis by the World Economic Forum.
The organization’s latest annual ‘Global Risks’ report for 2015 has recently been published, utilising responses from over 900 experts that partook in the World Economic Forum’s ‘Global Risk Perception Survey,’ which is prepared each year for the Davos, Switzerland WEF meeting.
The report, now in its 10th edition, looks at the top global threats in terms of impact and likelihood over the coming 10 years, and the presence of environmental risks such as extreme weather events and failure of climate-change adaptation, are becoming more apparent.
For clarification, the study defines a global risk as “an uncertain event or condition that, if it occurs, can cause significant negative impact for several countries or industries within the next 10 years.”
Addressing the threat of extreme weather events, part of the report reads; “The impact of natural hazards is a combination of the frequency and intensity of the hazard with the vulnerability and exposure of people, assets and economic activities. Strengthening resilience is an attempt to reduce the exposure and ultimately the potentially catastrophic impact of natural hazards.”
The study highlights the importance of building resilience against global risks concerning the impact of extreme weather perils, something the weather risk professionals in the reinsurance, catastrophe bond and insurance-linked securities (ILS) market are extremely capable of assisting with.
In a reinsurance market place that is currently flooded with traditional and non-traditional capital, the deployment of funds into established, or to build new risk-resilience financing pools, is a viable way for firms to add some diversification to their portfolios, while at the same time aiding the financial solvency of a region.
The Caribbean Catastrophe Risk Insurance Facility (CCRIF), African Risk Capacity (ARC) and the Turkish Catastrophe Insurance Pool (TCIP) are all relevant examples of how the insurance or reinsurance capacity, and in the future catastrophe bonds and ILS can provide a valuable financial back bone for economies post an extreme weather event.
Regarding impact, topping the list of global risks is water crisis, with failure to adapt to climate change coming fifth, extreme weather events failed to make the top five in terms of impact.
However, it should be noted that while weather risks come second from top in terms of their likelihood to impact, the fact that those responding do not place them high up in terms of potential impact as they perceive them is no surprise.
In fact, what the report shows is that sometimes the risks that we take for granted, like weather events, can have a lower importance placed on them despite them being very likely to create losses. This just serves to demonstrate that financial protection against extreme weather events is key, so the role of insurance, reinsurance and ILS remains vital.
The analysis also notes how societal risks, like pandemics, feature less prominently than in previous years, partly aided by global urbanisations positive impact on social well-being. However “when cities develop too rapidly, their vulnerability increases: pandemics, breakdowns of or attacks on power, water or transport systems; and the effects of climate change are all major threats,” noted Zurich Insurance Group’s Chief Risk Officer (CRO), Axel P. Lehman.
That extreme weather events feature high on the likelihood list and are absent from the top five global risks by impact, is perhaps also partly credit to the work of insurers, reinsurers, cat bond and ILS players, helping those polled to feel more secure. However it is not advisable to be complacent when it comes to extreme weather threats and the re/insurance market has work to do to drive this home.
The threat to supply chains and resulting business interruption is an area that is oft overlooked and if properly considered then the potential impact of extreme weather can be a much larger threat than those polled might expect.
It’s no surprise that large global insurance and reinsurance firms are placing an increasing focus on their weather risk management capabilities, as they seek to bring these skills to their large corporate clients to help them to better manage their extreme weather exposures.
While it’s highly likely that natural catastrophes and extreme weather events will occur the economic impact can be minimized through risk financing tools. As adverse weather events continue to increase in severity and frequency the relief/recovery capital provided by the alternative risk, reinsurance and ILS market is as important as ever.