Resisting the deluge: How the private sector can reduce flood risk in 2022
Richard Smith-Bingham, executive director at Marsh McLennan, says 2021 offered stark reminders of the threat posed by flooding to businesses and societies.
In September, Hurricane Ida made landfall as a Category 4 storm in Louisiana, one of the most intense tropical cyclones in the history of the state. Winds exceeding 150 mph (240 km/h) caused storm surges and coastal inundation, and heavy rainfall triggered extensive flash flooding. By the time winds faded and waters receded, Ida had caused over 115 fatalities and $65bn in damage, making it the fifth costliest tropical cyclone on record in the US.
Only a few months earlier, in July, record-breaking rainfall caused extensive flooding in Germany, Belgium and other European countries, killing over 240 people and causing more than $53bn in losses. On the same days, mass flooding in China killed 300 people and led to economic losses exceeding $24bn.
Flood presents something of a paradox. Despite it being one of the most common and destructive natural hazards, the risk it poses is systematically underestimated. Societal discounting of flood risk contributes to underinvestment in flood protection, leading to fatalities, public health problems and deeper inequality.
It can deal crippling shocks to businesses as well. In the wake of catastrophic flooding caused by Hurricane Harvey, nearly 15 percent of businesses had vanished from the disaster area by the following quarter.
To remain competitive and contain the most severe financial and reputational impacts of a world where severe floods are more frequent and increasingly intense, companies need to take a fresh look at how they are exposed and at new ways of protecting their business.
At the same time that a changing climate is making floods more treacherous, businesses are concentrating a larger portion of their assets and activities in flood-prone areas. According to Marsh McLennan, flooding threatens all the world’s major economies, with China, Japan and the US having the highest asset values exposed. This exposure will only increase as the planet continues to warm.
Business, government and civil society leaders are painfully aware of the challenges posed by climate change. Respondents to the latest Global Risks Perception Survey, the study that informs the 2022 edition of the World Economic Forum’s Global Risks Report, identified climate action failure and extreme weather as the most severe risks on a global scale over the next 10 years.
During the 2021 United Nations Climate Change Conference (COP26) countries tightened decarbonisation commitments to stave off the most severe consequences of climate change and pledged new resources for climate adaptation. The world, however, will still need to prepare for more extreme weather and chronic trends like sea level rise. Improving flood resilience should be a top priority in contending with the unavoidable impacts of climate change.
The greater risk and costs associated with more severe and frequent flooding are already showing in the marketplace. Lenders, investors and insurers are starting to screen firms’ exposure to flooding, with negative consequences for those firms perceived as ineffective at managing this risk.
A flood event can affect a company’s ability to access loans to finance its operations and deteriorate the risk profile of its mortgages, amplifying credit risk. Companies impacted by flooding may also see premium hikes, changes in policy conditions and even withdrawals of insurance cover.
Forward-looking companies can adopt a range of strategies to combat these costs and get ahead of their risk. Data collection and analytics are critical for companies to quantify flood risk, inform adaptation strategies and prepare for climate disclosures. Tools such as catastrophe models can play a crucial role in developing a 360-degree view of the threat posed by flooding. Only focusing on possible damage to their own assets may blind companies to vulnerabilities throughout their value chain and within the broader ecosystem on which they depend.
Data proliferation has also driven innovation in the insurance space: parametric solutions and community-based catastrophe insurance now offer companies new opportunities to limit losses and minimise disruption.
Businesses should help governments shoulder the responsibility of climate adaptation, and in combination can play to their respective strengths to find novel solutions for greater resilience. Synergies between the private and public sectors can provide the technical and financial resources to better understand flood risk, mitigate it, and avoid maladaptation. Firms can engage in policymaking processes, co-invest with public agencies and other stakeholders in flood resilience measures, and develop joint contingency plans with local authorities and business partners.
Cooperation between all stakeholders is critical if we are to contain physical impacts in the context of accelerating climate change, and companies that recognise the role they can play in the ecosystem are poised to assume a prime position. Those businesses that take concrete steps to mitigate flood risk within their operations and their supply chains are already experiencing material benefits. Companies that innovate and use the most up-to-date solutions will continue to build their advantage as the planet warms.