Traditionally, operational risks were managed through insurance coverage when:
They were not easily preventable or avoidable,
The cost of prevention was too high,
The events were extreme and unpredictable,
Or, coverage was required by regulations.
Clearly, the risks posed by extreme weather events fit these criteria, placing them in this category. In most cases, insurance was the primary means of managing such risks, as companies viewed it as a way to effectively transfer their risk.
However, circumstances have changed. Climate change has increased the frequency, intensity, and duration of extreme weather events, raising questions. Is insurance coverage alone enough to ensure resilience?.
Climate change has led to a rise in the frequency, intensity, and duration of extreme weather events. Insurance companies are increasingly unwilling to shoulder the full burden of these costs on their own.
A recent study by the World Meteorological Organization (WMO) indicates that nearly 50% of the global population will likely be exposed to extreme weather conditions within the next five years due to climate change. This significantly increases the likelihood that companies will face such situations. It’s clear that insurance companies are neither willing nor prepared to bear the entire cost alone.
As demand for this type of coverage grows, insurance companies are exploring new approaches, such as parametric insurance, or assessing the risk levels for each location based on historical and meteorological data. Some insurers, however, have chosen to step back from offering coverage for these risks altogether.
In response, what can companies, organizations, and agricultural or industrial operations do to secure their resilience? Even when they choose to insure against such events—despite rising premiums and the specific terms of parametric insurance—can they truly rely on the coverage they receive?
This growing uncertainty highlights an urgent need for a more proactive approach by all organizations, companies, industries, and agricultural enterprises.
Let's look at an example from recent history.
PG&E, one of the largest utilities in the United States, suffered severe financial and operational losses due to fires caused by its network. These fires were linked to inadequate infrastructure maintenance and the inability to address the increasing risks from climate change, such as drought and high temperatures.
In 2018, deadly fires in California were attributed to faulty power lines and aging PG&E infrastructure. These fires caused devastation in residential areas, resulting in human losses and extensive property damage.
The company faced huge lawsuits from victims of the fires, with damages amounting to billions of dollars. In 2019, PG&E was forced to file for bankruptcy due to financial pressures.
Although PG&E had insurance coverage to manage such risks, it was not enough to offset the huge costs. The company failed to implement preventative measures such as upgrading the grid, clearing vegetation around lines, and using risk prediction and monitoring technologies.
The full impact of climate change cannot be addressed solely through insurance, even with the most comprehensive policies. Preventive measures have become essential and will play a crucial role in building resilience.
The conclusion:
Insurance policies alone are no longer sufficient to address the protection of human life, environmental preservation, business continuity, supply chain stability, regulatory compliance, and, ultimately, a company’s resilience.
Given the new realities imposed by climate change, preventive measures are essential. The impacts of climate change cannot be fully mitigated, even with the best insurance solutions. While insurance remains important, proactive prevention is what will address the serious challenges posed by climate risks.
Furthermore, it’s now clear that investors, clients, and partners seek to collaborate with organizations that demonstrate responsibility and strategic planning for future risks.
E-On's RiskClima is designed to meet the critical demands of prevention. This innovative solution equips companies with all the information needed to build resilience, offering specialized climate risk management features, advanced forecasting models, and tailored mitigation recommendations.
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