Understanding your true natural catastrophe exposure

Understanding your true natural catastrophe exposure

Aon Benfield's recently released '2016 Annual Global Climate and Catastrophe Report' shows that 2016 was the seventh-highest year on record for natural catastrophe economic losses. Peter Cheesman, Head of Analytics for Australia and New Zealand at Aon Benfield, discusses why such losses are expected to continue rising over the coming years, and how climate change is just one of many factors that needs to be considered when evaluating the potential impact of natural catastrophes on your organisation.

Catastrophe losses to continue rising, but climate change is just one driver

In 2016, economic and insured losses arising from natural perils in the Asia-Pacific (APAC) region increased by 62 percent and 37 percent respectively over the longterm (2000-2015) average.

While an expected warmer atmosphere in the future as a result of climate change will contribute to an increase in the frequency and/or intensity of meteorological perils such as tropical cyclones, the 2016 increase in loss was largely due to a geological peril, earthquakes: the April earthquakes in the Kumamoto prefecture of Japan, and the November earthquake in Kaikoura, New Zealand.

There is currently not enough historical data to be able to categorically attribute any meteorological peril event as being caused (rather than being made more likely) by climate change. There are also many other factors unrelated to natural peril events that are expected to contribute to increasing insured losses from natural perils over the next few decades, particularly across the APAC region.

With widespread population growth and urbanisation observed across this region, the size of communities that are exposed to natural perils is constantly increasing. In fact the United Nations suggests that the next census study in 2020 will show that roughly half of the world's population will live within 100km of an ocean coastline. In Australia for example, the population and built environment continues to grow substantially along the coastline, large parts of which are exposed to tropical cyclones and stormsurge flooding. Insured losses in exposed areas will therefore continue to grow in the future even if the frequency and/or intensity of natural perils remains constant.

Likewise, as housing affordability drives people further from large urban centres, development of the built environment sprawls out into the outer suburbs over previously undeveloped areas. Urban sprawl development generally leads to a greater population exposed to natural perils such as bushfires. Also, with such rapid population growth and urban expansion, development of the built environment inside functional river floodplains is often allowed leading to a growth in exposed property to future flooding events.

While a warmer climate in the future is very likely to contribute to an increased frequency and/or intensity of natural peril events, future growth of the built environment is expected to largely determine the level of insured value that is exposed to natural peril events and will therefore significantly influence future insured loss.

Understanding your exposure

While your insurance cover should reflect your asset and rebuild values, you should also look at whether your business interruption is sufficient to enable you to recover and recommence your operations. The value of your cover is one component that might allow you to survive - or even thrive - after an event.

To better appreciate the breadth and depth of your exposure, you should:

  • Develop a robust disaster plan that looks at the consequences of an event beyond just property damage and business interruption that might be financially covered through insurance - such as operational and reputational issues that might impact a company going forward
  • Consider how disruption to your supply chains or distribution networks could impact your business
  • Be fully aware of any exclusions listed on your insurance policies and speculate how critical these exclusions might be

Knowing how your insurer will respond

Cash flow is crucial for survival of most businesses. So the question is, will your panel of insurers provide interim support before the final payout is received? For example, make available some quick funds so that you can set up new premises, or help you restock some of your items from other suppliers.

In our experience at Aon, some insurance companies excel in the area of service, and are set up to process claims in a realistic manner that's aimed at helping companies reestablish themselves quickly. The insurance payment is worth little, if the business has folded while waiting for it to be made.

Quantifying your catastrophe exposure

Catastrophe loss analysis is a major focus of the Aon Benfield Analytics team both globally and across Australia and New Zealand. We run commercial vendor catastrophe models as well as a suite of internal models that help analyse organisational catastrophe risk exposures. These insights allow us to help clients decide how much financial mitigation they need to purchase, or - from an insurance company's perspective - how much reinsurance they require.

Our team of catastrophe modellers and actuarial analysts put clearcut analytics behind the financial risk impact of events. We also help and advise clients in terms of supply chain interruption, and can help an insurer stress-test their claims processes, which is a critical area that can impact whether an insurer might not only survive a major catastrophe but actually thrive after the event.

Importantly, because we work with hundreds of clients, of varying sizes and across all industries, we can assist any company benchmark their operational risk management strategy.

Visualise and quantify your risk

ImpactOnDemand(R) is a highly innovative and versatile platform offered by Aon Benfield that enables our clients to visualise and quantify their risk exposures and risk accumulations, allowing them to better understand their risks and the potential loss from insured events, as well as make more informed business decisions.

This product enables risk to be mapped on a daily basis, and provides uptodate information, as and when events are occurring - such as earthquakes, cyclones, bushfires, hail event, and more.

ImpactOnDemand can also be used as a planning tool (for example, provide insights on future climate impacts for a proposed construction site).

To learn more about ImpactOnDemand, speak to a member of the Aon Benfield Analytics team.

The 2016 Annual Global Climate and Catastrophe Report can be downloaded here.