Risk management opportunities: climate change and Covid-19

The past year has shown the impact of interconnected events on a global scale

The prospect of a natural disaster and subsequent recovery is always a difficult endeavour for even the best prepared countries. In 2020, the volume of natural disaster events, including several that had impacts across multiple states and countries, led to above-average disaster and recovery costs. It forced governments to tap into already depleted emergency funding to account for the many billions of dollars in non-insured damage and recovery aid.

Perhaps the most challenging aspect for governments during the Covid-19 pandemic, even beyond fiscal requirements, has been planning large-scale evacuations and temporary housing measures after natural disaster events. Many countries introduced social distancing and strict screening guidelines that limited the number of people in each evacuation centre. The lack of facilities led to many people being sent to non-traditional displacement shelters for longer-term housing, often in hotels.

Some regions facing tropical cyclones or inland flooding placed Covid-19 patients in emergency hospitals that were often in high-risk hazard areas. These unintended consequences put heightened strain on the need for quick resilience planning.

The other difficulty was locating enough volunteers to provide aid in the hardest-hit areas during the recovery process. Organisations such as the International Federation of Red Cross and Red Crescent Societies noted some regional spikes in volunteer sign-ups, but many were asked to respond to disasters and provide mental health support virtually since physical aid was not possible. The frequency of large-scale events, notably in the US, Central America and Asia, stretched resources thin.

When faced with a sequence of medium- or large-scale disasters occurring within a short space of time, it is even more challenging for local and federal governments to properly plan and initiate responses. This also applies for the private sector, including the insurance industry. The past year is the latest example of interconnected events – whether natural or manmade – having a major impact on a global scale. These incidents can more accurately be described as ‘compounded’ or ‘connected extremes’.

Prior to 2020, public and private sector groups had already begun to recognise the direct links between natural disasters, climate change, healthcare, insurance, food insecurity, infrastructure and other societal and geopolitical concerns. In 2011 and 2017, major natural disaster events led to localised physical damage, creating secondary and tertiary global fiscal impacts far beyond where the events occurred.

In 2011, the Tohoku earthquake and tsunami in Japan and the floods in Thailand significantly impacted the global supply chain of many products. Despite feeling no direct physical impact, factories across Asia, Europe and North America were unable to manufacture their own products since key components from Japan and Thailand were never delivered. Such scenarios highlight potentially devastating feedback loops which can cripple economies and lead to prolonged human suffering.

The past year would have been challenging enough had it only been defined by the frequency of extreme weather events. The pandemic exacerbated the humanitarian impact. Delays in the shipment of typically standard international aid (such as food and healthcare supplies) prolonged initial recovery efforts that many developing or emerging countries are heavily reliant on. It also increased the delivery cost of aid as supply shortages and enhanced safety precautions required more monetary measures.

As a result, the United Nations increased their 2021 humanitarian aid appeal to $35bn – up from $28bn in 2020. It also anticipated 235m people, or one in 35 people worldwide, needing assistance from natural peril, geopolitical or pandemic-related incidents.

Covid-19 highlighted areas that need considerable improvement in both planning for and anticipating risk scenarios. The identification of risk is a critical first step.

Risk mapping is a valuable solution that can help create a risk management strategy. These tools can highlight the risk down to a granular level and identify areas that may require improved building code regulations or enforcement. However, this type of solution is more realistic for more developed nations. Countries that face widespread wealth inequality – meaning a higher portion of the local population living in poverty or with limited financial means – will require different methods of risk management.

Meanwhile, there are opportunities to rethink access to capital with solutions such as catastrophe bonds or parametric insurance. This trigger-based approach can quickly bring an influx of fiscal aid into areas that are not able to depend on federal funding. While natural hazards cannot be eliminated, the physical and human risk can be minimised or mitigated against by properly reducing vulnerability.

By combining the most effective resources from government, insurance, urban planning, academia, emergency management, real estate, investment banking and other important non-governmental organisations, this can create a strong framework that includes ideas from the most important stakeholders.

As climate change exacerbates a host of scientific, societal and geopolitical hazards, and global events such as Covid-19 occur in tandem, it has never been more critical to avoid creating new risks, address existing risks and start preparing for event scenarios previously assumed to be unrealistic.

The insurance industry has played – and will continue to play – an important role in these risk-based conversations. The industry has access to an enormous volume of data and has hired experts in earth science, geoscience, actuarial analysis and other data backgrounds. Combining this expertise with brokers, underwriters and analytical experts puts the industry in an excellent position to provide future mitigation strategies.

How we work together to implement lessons learned from highly complex catastrophe years such as 2020 will prove critical in the future. As new risks emerge, a multifaceted approach needs to be taken as the world learns to cope with these connected extremes that affect increasingly large populations around the world.

Steve Bowen is Head of Catastrophe Insight, Managing Director, Impact Forecasting, Aon.

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