The World Economic Forum’s Global Risks Landscape 2018 highlighted extreme weather events as the most likely and highest impact risk of 2018. In the report’s short 13-year history, the landscape has seen all five environmental categories, as being the highest risk.
These risks are naturally of great concern for businesses, and already a sobering reality for many because this year has proven to be a rocky road for supply chains thanks to a plethora of extreme weather events. These extreme heat waves, flash flooding, and killer wildfires even as far north as the Arctic Circle in Sweden are said to be a reflection of climate change.
UN Climate Change reports that extreme weather affects water supplies, plants, animals, ecosystems, and forests. Addressing the dangers associated with extreme weather conditions, the Executive Secretary of the UN Climate Change Patricia Espinosa said earlier in 2018, “We must keep an eye on the future. As the superstorms and monsoon flooding of last year and the extreme heat and extreme cold of this year show – we still have a long way to go to deliver on the promise of the Paris Climate Change Agreement”.
According to the National Centers for Environmental Information (NCEI), there had been 11 weather and climate disaster events in 2018 with losses exceeding $1 billion each across the United States. The 1980–2017 annual average is six events, showing that 2018 has been a big year for billion-dollar disasters.
It seems every year delivers a new set of challenges. After 2017’s hurricane losses, Asia faced Typhoon Mangkhut in the late summer of 2018. In the Philippines alone, the storm caused $260 million in damage, mainly to rice and corn crops. This caused widespread disruption in Asia’s food supply chain, with Asia’s major cities relying on imported food.
Farmerson Australia’s East Coast have been battling through what is widely reported as the country’s worst drought in living memory. This extreme event is impacting sheep, beef, and crop farming out of the country. The ABC has reported the crippling drought will affect the cost of Christmas lunch this year with poultry farmers suffering significantly.
In the US, Aon Reinsurance Solutions said that total economic losses from Hurricane Michael alone, including physical damage and net loss business interruption, is expected to rise above US$15 billion.
The severity of major weather events has brought about a new level of sophistication for global businesses. Alan Gier, global director of risk and insurance for General Motors (GM), told BusinessInsurance.com earlier in the year that GM has an active crisis centre that monitors weather and supply chain impacts 24/7. This system was born from the disruption brought about by the Thai floods in 2011.
These extreme weather concerns mean the insurance industry is on the frontline in the battle against climate change. “The impacts of climate-related risks are a growing reality for the insurance sector. This reality has key implications for that sector’s valuation,” stated a report by the Asset Owners Disclosure Project(AODP). It also states “Weather-related financial losses, regulatory and technological changes, liability risks, and health impacts related to climate change have implications for the business operations, underwriting, and financial reserving of insurance companies.”
When cargo vessels are forced to deviate from a pre-agreed route due to extreme weather, they are not infringing on their contracts with consignees.According to Hague or Hague-Visby Rules, any deviation made to save lives or property at sea shall not be deemed an infringement. This means shipowners are protected if they are forced, for safety’s sake, to deviate when facing these serious weather events.
However, when there is a deviation, the supply chain is likely affected and there may be a knock-on effect on businesses. Costs can be incurred from a range of issues, including discharging at an alternative port, damage, and delay. These costs are incurred by consignees.
Additional costs incurred by consignees due to weather-affected route changes may be covered by insurance, however as extreme weather becomes more common, premiums for delayed cargo will inevitably rise. The other major concern is that many shippers do not insure their cargo, meaning that the cost for delays will be incurred directly by them or consignees.