Escalating Flood Costs & Compounding Events Test Financial Resilience
By Dharisha Mirando 24 August, 2021
Can't avoid the extreme weather events we've baked in, we must be realistic and adapt - CWR's Mirando urges
It’s only August and what a year it’s been so far in terms of extreme weather. Whether it’s been floods, droughts, too high or too low temperatures – the extremes that the world has experienced this year have been unprecedented.
And we’ve only warmed by 1.1ºC-1.2ºC. What happens when we get to over 4ºC by 2100, which is possible according to the IPCC if we keep polluting the way we are? With the G20 focussed on decarbonising coal but still investing in the highly polluting oil and gas sector, these higher temperatures are looking more likely.
Must adapt for water risks as “Water is the primary vehicle through which we feel the impacts of climate change”
So, in addition to doing more to reduce carbon emissions, we must adapt to the physical impacts and factor them in because as the World Meteorological Organization (WMO) succinctly puts it “Water is the primary vehicle through which we feel the impacts of climate change”. To find out more on upcoming physical impacts, check out our summary “Code Red: 8 things you need to know about water in IPCC AR6“, but for now let’s look at the cost racked up so far on extreme events…
Costs are escalating
With the extreme weather setting new records as CWR’s Xu explains, it isn’t surprising that water-related hazards dominate the list of disasters in terms of both human and economic costs over the past 50 years. The top 10 events for economic losses include storms (US$521bn) and floods (US$115bn). Sadly, this is only set to rise with climate change.
The costs are clearly mounting – just looking at recent floods, the numbers look scary…
- Germany: the level of floods shocked scientists and broke multiple records as parts of Germany that typically experience 80 litres of rain/m2 for all of July experiencing 148 litres in 48 hours. This led to almost 200 deaths and up to €30bn needed for recovery. Currently, flood damage typically costs Europe €7.8 billion annually and the European Commission’s Joint Research Centre thinks this could go up to €48 billion per year by 2100. But with earlier melting of glacial snow according to the IPCC and given the flood costs in just Germany this year, is this low-balling it?
- China: the recent flooding in Zhengzhou was because the city experienced a year’s worth of rain over just a few days. Some areas actually recorded more rain in an hour than Germany in 24 hours. Over 300 people have died and millions of yuan of economic losses have been recorded. This happened even though the city has been investing millions on floodwater management as a ‘sponge city’ – but it just needs to do more to manage these more extreme flooding events.
- Australia: Parts of Eastern Australia were inundated by about a third of the rainfall they usually experience for a year in just a few days. Luckily there were very few deaths but insurers are forecasting a AU$1bn damage bill.
Compounding extreme events = more preparedness or rising clustered risks
We can’t avoid these risks as we’ve already baked in multiple impacts with our actions. So, we need to be prepared to lower the human and economic cost of these events through
- better flood management plans to reduce the overall impacts;
- warning systems so that affected areas can be prepared through evacuation and sufficient protection in place for assets; and
- better strategies for post-recovery so that flood-hit areas can still bounce back soon after an event.
Managing and planning for these risks become even more important because as we’ve seen this year, these extreme events quite often happen at the same time and sometimes in the same location – this is something the IPCC is calling “compound extreme events”.
IPCC defines it as “the combination of multiple drivers and/or hazards that contribute to societal or environmental risk. Examples are concurrent heatwaves and droughts, compound flooding (e.g., a storm surge in combination with extreme rainfall and/or river flow), compound fire weather conditions (i.e., a combination of hot, dry, and windy conditions), or concurrent extremes at different locations.”
If a lot of people, assets and economic activity happen to be in the same place as these compound events, then the losses are going to be even higher. We’re already seeing this in coastal areas as we explored in our CWR Coastal Capital Threat Series.
Do year-on-year compounding extreme events signal the end of insurance?
Insurers could play a major role by incentivising cities, banks and corporates to plan, run plausible worst-case scenario stress tests and adapt for the reality of more extreme weather events as well as chronic long-term risks due to climate change.
Insurance is already getting expensive & difficult to get due to the cost of extreme events…
However, insurance is not as widespread as many think – even in Germany only 46% of households have flood insurance. But even with insurance, you might be in trouble – it’s getting more expensive. And even worse, you might not be able to get insurance anymore – for example, Californians are finding it more difficult to get home insurance due to the wildfires escalating each year as droughts worsen.
… but can insurers even survive if acute extreme events become chronic risks?
And then the other question is, can the insurance sector survive higher extremes coupled with “compounding” events? Last year these events in the US meant that the insurance market paid out more in claims than it received in premiums. This could become the norm especially if the frequency of acute extreme events makes them into chronic risks. We are already starting to see this with wildfires and floods.
Clearly, we need to adapt and stop relying on false promises
Hoping that countries in the G20, that currently lead the pollution league table, will now do their part is silly. We need to stop running away from what we have locked in and be realistic about the worst case.
We need to stop siloing climate & water risks so we aren’t blindsided by oncoming systemic shocks
So, grab the bull by its horns, factor these risks into all plans, strategies and valuations, and adapt flexibly. Since water is how we will feel all climate impacts, according to the WMO “To effectively address both water and climate challenges, we must bring climate change and water to the same table – into the same conversation: Tackling them as one.”
Currently very few banks, investors, companies and governments are taking climate and water risks into account together when planning, whether it is for infrastructure spending or even long term business planning. But, we need to stop siloing these risks and value them properly as they have the ability to trigger systemic shocks across the financial industry. This isn’t the first time we’ve mentioned it either – just this year we talked about here and here. And this might happen sooner rather than later as central banks are starting to see the linkages too.
And when you do this, you’ll recognise that there are multiple investment opportunities here too because we need to decarbonise and everyone will need to adapt too. But you’ll only see this if your eyes are wide open.
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