Going to extremes With stormy skies ahead, the insurance industry and its corporate clients are under increasing pressure to prepare for extreme weather events
THE LEADERS of businesses worldwide must focus on effectively deploying capital to prepare their businesses for more weather-related property damage and business interruption losses in the near term, according to a recent report from FM Global. While US-based companies have their own regional exposures to worry about, from wildfires in the West to hurricanes along the Atlantic and Gulf coasts to tornadoes in the Midwest, today’s globalized world has opened up organizations to even greater natural catastrophe risks. “Where there are large-impact, widescale events, you’re seeing ripple effects that
That means CFOs can’t turn a blind eye to the risks their companies face as extreme weather events intensify. “They have to understand the impacts that can occur if they have a disruptive event,” Jones says. “Over the last 15 to 20 years, the trend is pretty consistent that we’re having not only more frequent [extreme weather] events, but also more severe events, both in terms of the magnitude of the storms that are occurring, as well as the magnitude of the impacts on businesses and the economy as a whole. CFOs have to pay more attention to any type of risk that is clearly growing and emerging and having larger impacts.”
“Where there are large-impact, wide-scale events, you’re seeing ripple effects that get larger and larger around the world” Eric Jones, FM Global get larger and larger around the world and impact more and more companies because of the far-flung nature of a lot of companies – but more importantly, the global nature of supply chains and how interconnected everything is,” says Eric Jones, operations vice president and global manager of business risk consulting at FM Global.
While it’s human nature to forget about susceptibility to catastrophes if two or three years pass without significant losses, that sort of short-term memory loss is more difficult today because of the frequency of events. Jones outlines what brokers can do to help CFOs batten down the hatches. “Trying to determine what the appro-
priate strategy is to deal with these risks starts with understanding the risk,” he says. “Also, understanding how much can that risk really hurt the bottom line [is important], so insurance professionals need to help their clients understand the risk and quantify [its] impact to the business overall.” Insurance companies themselves are also trying to get a handle on catastrophe risks by using risk modeling to understand exactly how much of their portfolio is exposed. Risk modeling companies compile data on various weather events and translate that into models that reflect the probability of future events. But it’s impossible to provide an exact answer as to what weather-related damages are likely to impact an insurance company’s portfolio in the next year or the next decade. “Everyone wants a number in the industry: How much is my risk going to increase by percentage terms or dollar
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