January 26, 2022

Companies facing the challenge of climate risk

A supplier in Kentucky (United States) whose warehouse was destroyed by a tornado; goods chartered by river which do not arrive due to a dry river; a component that cannot be found due to a surge in the price of raw materials … For companies, climate change rhymes with new risks.

It is the job of “risk managers”, responsible in companies for identifying strategic risks and indicating solutions to deal with them. To do this, they develop maps, visual documents in which the risks are classified according to their probability of occurrence and their impact.

→ READ. Climate change will drive up the cost of insurance

But where exactly are they in the face of ever more pressing climatic hazards? The first barometer published on Wednesday December 15 by the Association for Risk Management and Company Insurance (Amrae) and Axa Climate, a subsidiary of the French insurance giant, provides some answers. It is produced from the testimonies of 123 risk managers, members of the association.

Difficult to analyze the consequences of climate change

Respondents are aware of the climate risk. More than 80% of them fear the physical consequences of events such as storms, heat waves or even flooding on their organization’s infrastructure.

They also fear the impact of these climatic hazards on activity: whether it is difficulties in finding raw materials, energy at a reasonable price or even new regulatory constraints, such as a carbon tax that will go increase the production costs of more polluting companies.

When it is not purely a question of prohibition, as with air flights for journeys of less than two and a half hours. Without forgetting the aspirations of consumers concerned with more virtuous practices – but costly for companies …

“The problem is not at the level of awareness of climate risk but in the detailed analysis of its consequences”, also testifies Oliver Wild, president of Amrae and in charge of risk management at Veolia. Also, 56% of the risk managers questioned declared that they had no visibility on the impact of climatic hazards on the entire value chain of the company and therefore of its suppliers.

“Reasoning on the different climate scenarios”

Two factors explain the difficulty. One is of a decision-making nature: 43% indicate that their company does not yet have climate risk governance. Worse, only one in five risk managers has exclusive responsibility for climate mapping. Another factor, 60% of respondents admit lacking skills on these subjects.

In these conditions, it is difficult to draw up a good mapping, which is essential for the implementation of a prevention strategy. “Risk managers must reason about the different climate scenarios and not just observe the past: they must understand what the company is exposed to in ten years., estimates Antoine Denoix, CEO of Axa Climate. Once the risks are known, it is up to them to adjust the financing or insurance mechanisms to adapt. “

Except that Amrae regularly criticizes the lack of commitment of insurers alongside companies: 71% of respondents are not satisfied with the solutions proposed. “Climate risk is becoming more significant due to the frequency and increased violence of extreme weather events, but also because insurers are withdrawing”, Judge Michel Josset, chairman of the Amrae damages commission and insurance manager at the automotive supplier Faurecia. “We are more exposed and less assured. “ As a result, to avoid skyrocketing their insurance spending, companies must invest in their infrastructure to limit their vulnerability.

New forms of insurance

Respondents are also 62% to push for the development of “captives”, a kind of self-insurance, since a subsidiary of the group will be responsible for pooling part of the risk of other subsidiaries. Insurers would only intervene in the event of exceptional risks.

They could act via parametric insurance: the insurance is only triggered if a precise and objective criterion is reached. “A good example of useis that of a company which transports goods on the Rhine, explains Antoine Denoix. Due to the hot weather, the river is dry. If a water level drop threshold is crossed, the money is automatically paid to the company. “

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Costly natural disasters

Natural disasters cost 250 billion dollars (221 billion euros) worldwide in 2021, a bill up 24% over one year, according to an estimate by Swiss Re, one of the largest insurers and reinsurers in the world, published Tuesday, December 14.

Of this amount, 105 billion dollars (93 billion euros) are borne by insurers, an increase of 17% compared to the previous year.

The trend is towards an increase of 5 to 6% per year in losses for insurers in recent decades.

The costliest natural disaster for insurers this year was Hurricane Ida, which notably led to flooding in New York at the end of August.

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