Mitigating the impact of climate change in insurance and other financial services  

As
the
effects
of

climate
change
intensify,
extreme
weather
events
are
becoming
increasingly
frequent
and
severe.
The
US
experienced

25
extreme
weather
events
in
2023,
each
causing
losses
of
over
USD
1
billion,
with
a
total
cost
of
USD
73.8
billion.
 

These
climate
events
have
a
huge
potential
impact
on
financial
institutions.
In
2021,
large-scale
floods
affected
the
European
countries
of
Austria,
Germany,
Belgium,
the
Netherlands
and
Luxembourg,
causing

USD
43
billion
worth
of
damage
in
addition
to
a
tragic
loss
of
life.

According
to
Berenberg
analysts,
individual
insurance
companies
faced
total
claims
estimates
of
up
to
approximately
USD
300
million.
Berenberg
estimated
that
reinsurance
losses
ranged
between
USD
2
billion
and
USD
3
billion. 

For
other
financial
services
firms
outside
of
the
insurance
sector,
property
accepted
as
loan
security
might
face
climate-related
risks
as
well.
Longer-term
local

climate
change
risks
might
still
devalue
property
that
hasn’t
suffered
damage.
These
risks
might
include
threats
posed
by
sea
level
rises,
wildfires,
heat
waves,
flooding
or
other
natural
disasters. 

Some
firms
might
choose
not
to
invest
in
certain
landscapes
where
the
physical
risks
are
considerably
too
high.
As
a
result,
their
market
would
shrink. 

Across
the
financial
sector,
there
are
transition
risks
to
consider
as
we
move
to
a
low-carbon
economy.
Many
financial
services
firms
will
have
to
re-evaluate
a
significant
portfolio
of
investments
across
the
stock
market.
Financial
markets
might
reprice
shares
in
some
carbon-intensive
sectors
by
favoring

renewable
energy
over
fossil
fuels.
There
might
be
reputational
damage
associated
with
investing
in
companies
that
are
seemingly
causing
global
warming
with
excessive

greenhouse
gas
or
carbon
emissions,
rather
than
mitigating
it.
Supply
chain
or
other
business
interruptions
due
to
extreme
weather
might
also
hit
balance
sheets
in
listed
companies.
As
a
result,
pension
funds
and
other
stock
market
investments
might
suffer
adverse
effects. 

Developing
a
risk
management
strategy
for
insurance
and
other
financial
services  

In
recent
years,
financial
services
firms
have
realized
that
they
need
a
decision-making
strategy
that
accounts
for
the
implications
of
climate
change.
Methodologies
used
in
the
past
might
not
be
enough
to
account
for
new
weather
patterns
and
extreme
weather
events.
 

Firms
can
also
reduce
their
investment
risk
by
using
weather
and
climate
data
to
make
investment
decisions.
When
firms
are
trading
energy,
for
example,
they
can
forecast
renewable
electricity
generation
based
on
predicted
solar
and
wind
patterns.
Companies
can
follow
this
three-step
process
to
address
the
implications
of
climate
change
in
their
business: 

1.
Get
tools
to
accurately
assess
potential
climate
impacts

The

IBM®
Environmental
Intelligence
Suite
models
40
years
of
historical
weather
patterns.
It
enables
forecasting
on
these
time
scales: 

• Immediate
  weather
  scale,
  looking
  two
  weeks
  ahead 
• Sub-seasonal
  scale,
  forecasting
  one
  year
  ahead 
• Climate
  scale,
  modeling
  up
  to
  the
  year
  2100  

Using
a
graphical
user
interface
(GUI),
financial
services
firms
can
view
properties
in
the
context
of
the
climate
risks
in
their
specific
location.
This
GUI
enables
a
more
complete
risk
assessment
when
considering
an
insurance
or
mortgage
application.
Financial
services
firms
can
use
the
tool
for
“what
if?”
analysis
to
better
understand
the
likelihood
of
various
climate
scenarios
and
help
to
draw
up
mitigation
plans
to
counter
extreme
weather
risks.
 

2.
Create
an
operational
strategy
to
use
weather
data

A
new
or
expanded
team
might
have
to
fully
take
advantage
of
weather
data
throughout
the
business.
Firms
might
need
to
overhaul
their
risk
assessment
and
portfolio
management
practices
to
include
climate
risk
and
opportunity.
Companies
can
use
weather
data
to
help
write
damage
assessment
reports,
guide
risk
assessors
on
location
and
identify
insurance
claims
fraud.
Investment
decision-makers
also
need
weather
and
climate
data
so
they
can
use
it
for
better-informed
trading
in
sectors
such
as
energy,
agriculture
and
food.
 

3.
Engage
customers
with
new
offers

There
are
new
opportunities
to
attract
and
retain
customers
by
sharing
climate
intelligence.
Insurance
companies
can,
for
instance,
alert
their
customers
to
threats
that
their
properties
face
so
they
can
protect
them.
To
defend
against
wildfires,
property
owners
could
clear
furniture
and
vegetation
around
the
property
that
might
spread
flames
to
the
building.
In
areas
vulnerable
to
flooding,
they
could
add
flood
defenses
and
protections.
In
this
way,
financial
services
firms
can
reduce
their
financial
risk
while
also
increasing
customer
satisfaction.
 

Financial
services
businesses
can
also
create
new
products
by
using
weather
and
climate
data.
For
example,
if
an
extreme
weather
event
happens,
parametric
insurance
offers
an
agreed
fixed
payment.
Customers
can
get
paid
faster
because
there’s
no
need
to
assess
damage. 

To
respond
to
climate
disruptions
and
manage
the
increased
risk
resulting
from
extreme
weather
events,
financial
services
firms
need
accurate
weather
insights.
The
delivery
of
these
insights
should
enable
firms
to
understand
the
climate
risk
associated
with
countries
or
properties
that
they
are
interested
in.
 

Not
only
does
weather
data
help
reduce
the
extent
of
losses,
but
it
also
creates
new
opportunities.
Renewable
energy
forecasting
can
inform
energy
trading
and
insurance
companies
can
help
homeowners
understand
both
the
threats
their
properties
face
and
how
to
counter
them.
By
cutting
the
cost
of
extreme
weather
events
and
seizing
new
business
opportunities,
financial
services
firms
can
turn
weather
data
into
a
powerful
competitive
advantage. 

Learn
more
about
the
IBM
Environmental
Intelligence
Suite