Swiss Re warns of 'cascading' climate risks to supply chains and society - BusinessGreen

Swiss Re warns of 'cascading' climate risks to supply chains and society | BusinessGreen News

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Insurance giant highlights raft of interconnected emerging risks linked to climate change that threaten to trigger business losses and economic slowdown

The world is facing multiple interconnected crises which are resulting in ever more complex risks to businesses, governments, and societies, insurance giant Swiss Re has warned.

A new report this week from the company warns the "cascading effects" of escalating climate impacts, economic uncertainty, and geopolitical tensions are at the heart of the worsening risk outlook faced by many businesses.

The analysis explores how to improve risk management and preparedness in face of the emerging and worsening threats faced by businesses, supply chains, and the global economy, including the multiple, cascading risks posed by climate change.

It follows data released in March by the insurance giant estimating economic losses from increasingly frequent natural disasters in 2023 reached $280bn, of which only 40 per cent - $108bn - was covered by insurance. It marks the fourth year running insured losses have topped $100bn.

Yet beyond direct damages, the report explains how climate change risks are takingt many forms, with potential worsening impacts on infrastructure, food security, migration, crime, societal destabilisation, and increased geopolitical tensions all serving to ratchet up costs and act as a drag on economic growth. "The accumulation of damage can be significant," the report warns.

"We live in a world characterised by interconnected crises, which in turn can give rise to new risks," said Patrick Raaflaub, Swiss Re Group's chief risk officer. "For re/insurers, it is key to anticipate trends and understand how major global issues such as climate change, economic uncertainty or geopolitical turmoil could impact not only the industry but also society as a whole."

As an example, it cites the opening up of new trade routes in the Arctic Circle as icebergs melt, providing potential access to new resources yet at the same time triggering tension between states over influence and control in the region "leading to growing risk of military escalation".

Several studies have also indicated a general increase in crime rates as temperatures rise, including one which found a 22 per cent increase in social media online hate messages across the US when temperatures rise above a 12-21C window, according to the report.

The report acknowledges that the "cascading non-linear effects of climate change are challenging to project over the long term in general, and with respect to security developments", but stresses that it remains important for businesses and governments to undertake climate risk assessments.

"It is also vital for enterprises as part of business continuity planning," Swiss Re said. "A company needs to review its operations for all potential disruption scenarios that changes in climate may present, beyond the physical risks posed by natural perils themselves."

Extreme weather is just one of 16 emerging, interconnected, and increasingly complex risks highlighted in the report which could have significant impacts on the insurance sector and society, with other identified risks ranging from the impacts of deep sea mining and cyber fraud to the dirsuption caused by AI and social isolation and loneliness.

A major key risk area highlighted in the report is supply chains, the resilience of which became a big priority issue for companies in the wake of the widespread disruption caused by the Covid-19 pandemic.

The report notes how the focus for many companies has shifted back towards immediate cost savings, despite growing risks to supply chains due to a multitude of factors such as climate-driven weather extremes, economic uncertainty, geopolitical volatility, and heightened cyber and technology threats.

It stresses that the decreasing resilience of supply chains leads to more business interruptions, which can lead to economic slowdown.

"Given the current situation and the negative outlook on these risk drivers, supply chain resilience should be at the top of companies' agendas," said Swiss Re. "If risks accumulate or coincide with an already stressed supply chain, the economic fallout could be significant."

Meanwhile, climate change and supply chain risks also affect healthcare infrastructure, which is being undermined by consistent underfunding in many societies and can quickly turn into a drag on businesses and economies as public health deteriorates.

"Essential services such as water, sanitation and electricity supplies may be compromised under more extreme climate scenarios that cause a higher risk of frequent flooding and other disruptive events," the report states. "Weakened health services increase risks for societies, with delayed or inadequate care contributing to higher morbidity and mortality, and thus also impact economies through increased health-related absenteeism and understaffing.

"Underfunding of healthcare systems and the impacts thereof are a concern across low-, middle- and high-income countries."

Swiss Re has repeatedly warned that higher premium rates for property insurance will not be enough on their to tackle growing losses from intensifying weather hazards driven by climate change, as higher premiums make insurance less affordable and accessible.

As such, the insurer argues adaptation actions such as enforcing building codes and erecting flood resilience measures are essential to help curb premium rates for consumers, alongside accelerated efforts to reduce carbon emissions.

Gianfranco Lot, Swiss Re Group's chief underwriting officer for property and casualty reinsurance, told the Financial Times this week that the industry had significantly underestimated the impacts of recent natural disasters in Europe and that some areas have become "uninsurable".

"Whether it's the Turkey quake... or the floods in Germany or the hailstorms in Italy, models were off by factors as opposed to 10 or 20 per cent," he told the newspaper.

Last year, Swiss Re was one of several major insurers to exit the Net Zero Insurance Alliance, along with the likes of Munich Re, Zurich and Hannover Re, amid concerns among some members over issues such as antitrust risks and strict requirements on emissions reporting. But despite leaving the group, Swiss Re reiterated its commitment to its sustainability strategy.

You can now sign up to attend the fifth annual Net Zero Festival, which will be hosted by BusinessGreen on October 22-23 at the Business Design Centre in London.