Last year, severe floods devastated Eastern Spain, particularly Valencia, resulting in hundreds of deaths and marking the most lethal flood event in a single European country in more than 50 years.
The disaster has renewed focus on the need for more effective climate risk management strategies. Torolf Hamm, senior director of physical climate risk at WTW, argued that traditional approaches to natural catastrophe (nat cat) and climate risk modelling are insufficient for addressing modern climate challenges.
“Good practice physical climate risk management today means using modelling techniques alongside scenario stress testing to capture compounding impacts,” Hamm said.
He pointed out that traditional models, based on historical data and short-term perspectives, fail to address the growing intensity and frequency of climate events and often overlook secondary perils.
Hamm said that secondary effects, such as landslides caused by heavy rainfall, can prolong disruptions and cause further damage to infrastructure. These risks highlight the limitations of relying solely on traditional models.
“Imagine there was a massive downpour of rain after a prolonged drought in London (something we’ve already seen in September this year and in July 2021),” Hamm said. “To plan for this eventuality properly, you will need to understand how the dry condition of the soil will influence where excess water will flow.”
He stressed the importance of stretching the boundaries of climate risk assessments by incorporating "what if" scenario testing. This approach helps organisations identify vulnerabilities and develop strategies to address them.
Hamm also noted that the traditional separation of treasury, risk management, and sustainability functions no longer serves organisations facing escalating climate risks.
“By collaborating across departments, you can share insights and strategies, enabling you to identify and mitigate climate risks more effectively,” he said.
This integration becomes essential in meeting regulatory requirements, such as the EU’s Corporate Sustainability Reporting Directive (CSRD), which mandates businesses to disclose both their financial exposure to climate risks and their environmental impacts.
Hamm provided an example of how risk managers and sustainability teams can work together. “A risk manager looking to build resilience against a flood risk may have the option of recommending a flood wall or a nature-based solution originating from the sustainability function. A nature-based adaptation may be more expensive in the short term, but could have longer-term benefits.”
As traditional insurance markets face growing challenges, many organisations are turning to alternative risk transfer (ART) solutions, such as captives and parametric insurance, to manage climate-related uncertainties.
“Where insurance becomes harder to access or too expensive, a captive lets you build up surplus risk finance over time to help pay for the impacts of catastrophic risks such as floods or droughts,” Hamm said.
He highlighted the benefits of parametric insurance, which pays out based on predefined triggers rather than requiring physical damage. “For example, if climate change-amplified weather events damage infrastructure meaning you can’t get your goods to your customers, a parametric arrangement can give you a cash injection to help you cope.”
Combining ART options with traditional insurance and refined modelling techniques allows businesses to be more proactive in negotiating coverage and differentiating their risk profiles.
“By carrying out this extra work to understand what the actual risk looks like beyond traditional natural catastrophe and climate risk modelling, you differentiate your risk from your peers, making it more likely insurers will compete to offer you capacity,” Hamm said.
Hamm emphasised the value of engaging with external stakeholders, such as supply chain partners and local authorities, to develop more comprehensive climate risk strategies.
“Understanding how your supply chain partners and local authorities would respond in the face of a given climate threat manifesting, such as floods, can help you develop more robust business continuity plans and reduce the impact catastrophic climate events would have on your business,” he said.
This broader perspective enables organisations to align their emergency response plans with those of other key players, ensuring a coordinated recovery effort.
Hamm noted that many climate disclosures fail to support organisations in addressing physical risks or transitioning effectively.
“Generic statements, significant underestimates of risk, and a lack of detail on plans to meet targets are common characteristics of many climate disclosures currently produced globally,” he said, referencing research by the Financial Reporting Council.
He also argued that adopting a more comprehensive approach to disclosure can help businesses understand the interplay of physical and transition risks, ultimately shaping more resilient strategies.
“Going beyond climate disclosure metrics such as greenhouse gas emissions will help shape a more resilient business strategy, capture future opportunities, and manage risk,” Hamm said.
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