Why Companies Should Be Prepared For Extreme Weather

The author is Standard & Poor’s Financial Services

Over the past few decades, we’ve witnessed an increase in extreme weather events. In 2013, reinsurance group Munich Reinsurance Co. recorded 888 loss-related natural catastrophe events worldwide, slightly down from the 936 events recorded in 2012 but above the 10-year average of 822.

Of the 888 documented loss events, 90% were weather-related, encompassing storms, floods, heat waves, cold snaps, droughts, and wildfires, while earthquakes and volcanic eruptions were responsible for the remaining 10%.

According to Munich Re, weather event-related losses have been increasing since the 1980s, and the volatility of losses has been much higher during the past decade.

In 2013, overall worldwide natural catastrophe losses from the 888 recorded events totaled US$135 billion, among which US$124.5 billion was weather related.

Between 1980 and 1989, the insurance industry paid out US$15 billion per year for weather damage worldwide. By 2010 to 2013, this figure had risen to US$70 billion per year.

Climate event risk can have a significant impact on an economy. According to Allianz, weather and climate directly or indirectly affected US$5.7 trillion of the U.S. economy in 2012, representing over 30% of GDP.

Routine weather variances cost US$534 billion, equivalent to 3.4% of U.S. GDP. Comparable exposures for the EU in 2012 were US$5.9 trillion, equivalent to 35.8% of GDP and US$561 billion, equivalent to 3.4% of GDP, respectively.

Climate event risk represents both a short- and long-term exposure for companies. Increased rainfall, flooding, and storm intensity can interrupt production, while extreme heat and fires can affect output and supply/distribution networks, potentially increasing cash flow volatility and disrupting supply chain links.

Overall, we believe that credit quality may deteriorate if a company does not implement adequate risk management measures to cope with climate events.

Indeed, an effective management strategy to mitigate short- and long-term climate-related exposures is becoming a critical issue for an increasing number of non-financial companies.

(The article has been edited for clarity)