Climate Change: Evolving Property Risk to Resilience

Climate Change: Evolving Property Risk to Resilience
August 20, 2024 5 mins

Climate Change: Evolving Property Risk to Resilience

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Organizations must consider the impact of climate change on property, which will vary now and years into the future. Therefore, a thoughtful approach can enhance risk mitigation and resilience strategies.

Key Takeaways
  1. Identifying emerging property risks can reveal opportunities for developing mitigation plans that help improve business resilience for the long term.
  2. Establishing risk mitigation and resilience strategies should include considerations both “inside the fence” at a given property location, as well as climate impact risk on the wider region.
  3. Understanding the total cost of risk and measuring resilience can help optimize mitigation investments and obtain favorable pricing, terms and conditions from insurers.

Running a business in a dynamic environment where emerging risks constantly evolve presents a major challenge to effective risk management. Resilience in the face of a shifting risk landscape should be a goal of every organization, but it requires change in how risks are approached. Historically, the focus of risk management was to get back to normal, whatever that might be for a given organization. But a stronger resilience approach goes beyond returning to normal operations. Resilience is about achieving a better position than before.

Risk is more than the state of a business today, or on any given day. Future conditions, too, are important to understand. This means risk professionals should factor in the impact of climate change on their organizations’ people and assets. Doing so can have multiple benefits, in addition to strengthening assets and mitigating losses. As countries and states develop rules on climate change disclosures, compliance with regulatory requirements and stakeholders’ expectations will be simpler for businesses with a head start.

The impact of climate change on property will vary today and 20 years or more into the future. Examples include higher heatwave and drought frequency and severity; straining energy supplies and control systems; intense rainfall and sea level rise contributing to more flooding; and changing patterns in severe convective storms, which can damage buildings and disrupt business.

Organizations should take advantage of climate risk modeling as a bridge between science and solutions. Using this technology can help answer critical questions, such as:

  • What will property hazards look like when factoring in climate change?
  • What will organizations require to mitigate those future risks, so organizations can be stronger and more resilient?

Inform Mitigation and Resilience Strategies Through Risk Modeling

Risk modeling has been performed for years to good effect. The effort to quantify risk is always improving, as loss data is fed back and used to further refine the models. Predictive modeling now focuses on quantifying climate change impacts. This data and risk quantification can help enhance risk mitigation and resilience strategies that consider the impact of climate change.

Identifying emerging property risks can reveal opportunities to develop mitigation plans that improve business resilience for the long term. For example, a manufacturing facility within a few miles of the Gulf Coast might not have experienced damage or loss from windstorms or storm surge. But that same site in 10 or 20 years might have a vastly different exposure due to shifts in climatic conditions. That could lead the facility’s owner to make a greater risk mitigation investment to compensate for the increased exposure.

Property Risk Mitigation Options

Retrofitting or fortifying existing assets to withstand property perils can be expensive. In some cases, taking such actions could prove to be worth the investment. Constructing an edifice to a “building code-plus” standard — that is, beyond what the current building code requires — is a tough choice for property owners. With the right data and risk quantification, however, property owners can make informed decisions about risk mitigation for various perils, including flood and severe convective storms (SCS).

Loss severity and volatility remain high for flood and SCS. The National Oceanic and Atmospheric Administration (NOAA) reported 28 separate weather and climate disasters in 2023 that caused damage of $1 billion or more. Of the 28, four were flooding and 17 involved severe weather, hailstorms or tornadoes.1

Taking a global perspective, Aon’s 2024 Climate and Catastrophe Insight notes nearly 400 natural disasters occurred in 2023, resulting in above-average economic losses of $380 billion. The report adds that 2023 was the hottest year on record, and severe convective storms were the most damaging peril for insurers. Preparing for such events is more than prudent; it is essential to protect lives and property.

A good place for risk mitigation and resilience strategies to start is “inside the fence” at a given property location. Then consider the impact of climate risk on the wider area and region. Here are some things property owners should consider to improve their resilience:

  • Visualize risk impact at different levels.

    Determine the exposure and mitigation options at the location, surrounding area and broader region. If a flood or severe weather occur, how will they affect the location and its operations?

  • Account for a lifespan of assets.

    The longevity of a given asset varies by owner. Some may keep a property for decades, while others may sell assets frequently. How long an owner elects to maintain a property can influence its level of climate risk mitigation investment.

  • Design for climate change hazards.

    A critical step toward resilience is to design assets with climate change hazards in mind. Property owners should remain aware of and encourage similar action at the local and regional level, not just at their own sites. For example, in Harris County, Texas, voters approved a $2.5 billion bond to fund flood resilience2 following 2017’s Hurricane Harvey, which dumped a record amount of rain and caused unprecedented damage to the county’s drainage systems.3

Resilience and Optimizing Risk Finance

Achieving resilience offers numerous advantages for property owners. An obvious one is faster recovery from climate events. Another advantage is the ability to optimize risk financing, particularly risk transfer.

At a time when the cost to insure properties remains high, articulating resilience can make a meaningful difference. Better information on total cost of risk and measuring resilience are both helpful in optimizing mitigation investments and obtaining favorable pricing, terms and conditions from insurers. Property owners should consult an experienced risk advisor early in the process to help them make better decisions on assets, even before plans are put to paper, to maximize resilience and risk financing options.

Aon’s Thought Leader
  • Michael Panfil
    Managing Director, Property Risk Control, Aon Global Risk Consulting

1 National Oceanic and Atmospheric Administration: Billion-Dollar Weather and Climate Disasters
2 Harris County Flood Control District: 2018 Bond Program
3 Harris County Flood Control District: Recovering from Harvey

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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