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Climate Change: Evolving from Risk to Resilience

By Michael Panfil | Managing Director, Property Risk Control, Aon Global Risk Consulting

Running a business in a dynamic environment where emerging risks constantly evolve presents a major challenge to effective risk management. Building resilience in the 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 has been on getting back to normal, whatever that might be for a given organization. A resilience approach goes beyond returning to normal operations. Resilience is about getting to a better position than before.

Risk is more than the state of a business today, or on any given day. Time is essential in considering evolving threats, and therefore it is important to understand the impact of future conditions, too. 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 organizations that a have head start.

The impact of climate change on property will vary, in the present moment as well as 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 severe 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 is helpful in answering 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

Risk modeling has been performed for years, by Aon and others, to good effect. This effort to quantify risk has been continuously improved as loss data is fed back into and refines the models. Predictive modeling now is focusing 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.

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 and 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 life span 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, Harris County, Texas, voters approved a $2.5 billion bond to fund flood resilience following 2017’s Hurricane Harvey, which dumped a record amount of rain and caused unprecedented damage to the county’s drainage systems.

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.

For more information on property risk and resilience, visit https://www.aon.com/en/capabilities/risk-management/property-risk-management

Michael Panfil is Managing Director of Property Risk Control at Aon Global Risk Consulting, a division of Aon plc.