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Adaptation & insurance in a changing climate

There has been a growing emphasis in the climate debate on the need for adaptation. It was a topic of intense debate at COP28. and will be a subject of welcome discussion at GreenBiz 2024.

There has been a growing emphasis in the climate debate on the need for adaptation. It was a topic of intense debate at COP28. and will be a subject of welcome discussion at GreenBiz 2024 at a panel on adaptation and insurance. As severe weather events like floods, droughts, extreme heat, and hurricanes become more frequent, intense, and costly, adaptation efforts are critical for protecting communities and businesses.

A greater emphasis on adaptation, however, doesn’t decrease the importance of mitigation. Efforts to mitigate climate change through transition plans and emissions reduction remain, of course, critical. Mitigation and adaptation complement each other. Effective mitigation reduces the need for adaptation in the future, and successful adaptation can make people and businesses more resilient to future and current climate impacts. Adaptation also makes sense from an economic perspective. A World Economic Forum whitepaper from 2023 called for businesses to put greater emphasis on adaptation, pointing out that financial impacts due to physical climate risks came to about 10% of annual sales in a survey of major businesses.

More must be done to understand the risks that climate change presents and to build resilience against those risks through adaptation. As insurance brokers, and by working closely with the wider insurance sector, we have a unique insight into those risks and impacts and how best to manage them.

Why we need to focus on adaptation

The impact of climate change on weather events is becoming increasingly evident. Analysis shows that 2023 was, by some distance, the warmest on record. The frequency of extreme weather events is also on a steady upward trend, which can be illustrated by the number of large-loss natural hazard events tracked by insurers. All of these took a devastating toll on lives and livelihoods, as well as wreaking economic damage. In 2022 alone, natural disasters caused economic losses in the region of $313 billion.

The risks of climate change extend far beyond a business’s own assets, and adaptation strategies should take this into account. More businesses are now recognizing the impacts of broader climate-related risks, such as supply chain disruptions caused by extreme weather events. For example, the Panama Canal — a key global trade route — is experiencing a severe drought which has lowered water levels and resulted in a 36% reduction in total transits in the past month compared to the previous year, according to the UN’s trade and development body, UNCTAD. Some organizations are adapting to supply chain disruption by diversifying their supply chains and altering the layouts of their networks to target vulnerabilities, but adjusting global supply chains is a slow and complex process which is hampered by a lack of visibility across the supply chain.

Climate impacts are also having a growing impact on the health, safety, and livelihoods of people around the world. All workers, whether they work indoors or outdoors, will be increasingly vulnerable to the disruption and potential injury from climate-related events. By 2030, the equivalent of more than 2% of total worldwide working hours are projected to be lost every year because it is too hot or because workers have to work at a slower pace, according to the ILO. Extreme heat has been shown to exacerbate the rate of injuries in indoor settings, such as factories, and outdoor settings like construction sites. As such, rising global temperatures are contributing significantly to workplace injuries. Marsh conducted analysis last year that showed that heat-related worker compensation claims have increased significantly in the last 10 years. The number of claims peaked during the El Niño event from 2014 to 2016, which brought even hotter weather than usual.

Climate change risks are pervasive and far-reaching, and affect not only a business’s assets but also its supply chain and the people along it. As such, effective mitigation strategies should consider and address all of these aspects. By understanding exposure to risks and taking steps to mitigate them, businesses can fully account for and manage the many and varied risks that climate change impacts present.

The benefits of adaptation

Adaptation not only offers an ROI in terms of business resilience, but it also supports and enables mitigation efforts. In fact, benefits  include an opportunity for differentiation: those with robust adaptation strategies in place will be well-prepared for the future and able to more consistently pursue efficiency, growth, innovation, and sustainability with fewer disruptions. Examples of adaptation efforts include drought-resistant crops, reforestation, and early warning systems that are already bringing multidimensional benefits to people, businesses, and communities.

As the impacts of climate change become more frequent and severe, it will become increasingly important for companies to better understand and improve their resilience to climate change. To effectively shape adaptation strategies, we need to look far beyond owned assets and think about the risks that climate change presents across value chains including N-tier suppliers and the people involved throughout. The insurance industry has a deep understanding of the risks posed by climate change, and can shape proactive responses to its risks which place adaptation alongside mitigation at their core. Insurers bring expertise in looking at these risks through data, and bring rigor to organizations who want to fully understand the different dimensions of climate risk.

Foundational to those efforts is having visibility of supply chains. Whether it’s for quantifying emissions — specifically Scope 3 emissions — or reducing exposure to physical risk events, visibility into the supply chain is an essential enabler. This is the first step for companies who want to prioritize effective adaptation strategies. As the impacts from climate change continue to intensify, these will become more important than ever. Not only can successful adaptation protect businesses and communities from the worst impacts of climate change, but they can also power the innovation needed for a net-zero future.