Three things investors need to know about Harvey, Irma and future extreme weather.
In the last few weeks, we have seen extreme weather events in different parts of the world. Climate science confirms that extreme precipitation events are worsening and will occur more often in the future. Heavy rainfall and extreme events such as hurricanes are often associated with flooding and exacerbated by sea level rise.
Important financial risk
Flooding and extreme events can cause significant damage, particularly in urban areas that are densely populated and where many companies are concentrated.
After the devastation of recent hurricanes like Harvey and Irma, the costs estimates are adding up. Moody's Analytics estimates damage from hurricanes Irma and Harvey to total between $150 billion and $200 billion. In addition, the economy could suffer another $20 billion to $30 billion in lost output.
CICERO works in collaboration with some of the largest institutional investors in the world to improve climate risk information for financial decision-makers. At the top of these investors’ priority list is improving information on water risk. To date, water risk tools focus primarily on water scarcity. But we can’t overlook the growing risk of too much water in the form of flooding and extreme events.
Three lessons learnt
Here are three things that investors need to know about the financial impact of extreme events and flooding:
1. No one is safe: Extreme events can hit businesses in all sectors
The most visible consequence of flooding is damage to physical infrastructure such as homes, roads and business facilities. There are also indirect impacts such as electricity and transportation disruptions that can impact the production of all goods and services.
For example, hurricane Harvey closed down the Houston airport for several days affecting many travelers and businesses. Electricity outages disrupted the flow of goods and services across the economy, while also consumer purchases slowed down.
2. Total costs are underestimated and on the rise
Total insurance losses for storms and hydrological events including floods have increased over the past two decades, as shown in the modelling by The Economist below. But these figures are only measuring the insurance payouts; additional losses by public and private entities are not covered by insurance.
3. Do not assume insurance will cover business losses
According to our comparative analysis of flooding events, 60% of total costs for Copenhagen cloudburst in 2011 were covered by insurance, and only 40% of total costs of Superstorm Sandy in New York in 2012. Moreover, the insurance industry responds to major flood events by reducing coverage or charging a higher premium. This could lead to less insurance coverage of future flooding events.