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Climate change, extreme weather boost supply chain risks

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SOUTHAMPTON, Bermuda — Climate risks are directly connected to supply chain risks that should be identified and mitigated as extreme weather events continue to become more severe and intense and cause rising business interruption losses, experts say.

“As warm water is the fuel for hurricane intensity, the potential is for the strongest events to become more frequent,” Mark Guishard, director of corporate and community relations for the Bermuda Institute of Ocean Sciences in St. George, Bermuda, said at the 2018 Bermuda Captive Conference in Southampton, Bermuda, on Wednesday. “As sea levels rise as well and coastal populations grow, so does the exposure of lives, livelihood and property to storm surge inundation impacts.”

“It’s worth clarifying that no one hurricane is caused by climate change,” he continued. “However, the intensity, track, size and impacts from these extreme events are influenced by changes in the background environment, which is itself being altered by climate trends. In the Atlantic basin, it’s sobering to note that economic damages from the 2017 hurricane season and overall during the 2017 year of losses have now been estimated in excess of $330 billion … and untold human suffering that continues in the Caribbean as a result.”

“No one hurricane gives us data that’s conclusive about anything because of the randomness and the relative infrequency of extreme events,” said Kevin O’Donnell, president and chief executive officer of Renaissance Re Holdings Ltd. in Pembroke, Bermuda. “There will need to be a pattern that will only be visible over time. But when we look at the data, we can certainly conclude that we have seen rising temperatures and one can argue what the effects of rising temperatures are. I happen to agree that it will increase the severity of large events and probably the water intensity of those events as well.”

Only about $130 billion of the 2017 losses were insured, he noted.

“What that represents is an opportunity for us as an industry to think about ways in which we can we protect peoples’ lives,” Mr. O’Donnell said. “That can be through building resilience through mitigation. It can be through new products. It can be through better coverage. Here in Bermuda, about $30 billion of that loss will be paid. There’s nothing unusual about that level of loss here and I think it’s a testament to the strength of the markets which are paying those losses in that every company that was impacted in (2017) was there to continue protection in 2018.”

None of General Motors Co.’s manufacturing facilities were located within 100 miles of the areas affected by last year’s hurricane activity, said Alan Gier, global director of risk and insurance for the auto manufacturer in Detroit.

“However, we have a very complicated supply base,” he said. “The good news is that given all the forecasting that is available on hurricane front, we can work with our suppliers very closely to ensure they can either bank inventory or they can produce and ship sooner. We do have a mitigation strategy in effect for the entire hurricane season.”

But during extreme weather events, there may be some unforeseen challenges, such as those experienced in Houston in the energy sector during Hurricane Harvey, Mr. Gier said.

GM has an “active” crisis center that “watches the weather 24/7” and begins contacting suppliers when extreme weather events are forecast, he said, adding that the firm has developed a “robust” system partly in reaction to the Tōhoku earthquake and the Thai floods in 2011.

“People felt pretty good because none of our production or manufacturing facilities were in the way,” but those events impacted both its direct suppliers and the suppliers of its suppliers, meaning “the visibility into that supply chain becomes very difficult.”

In response, the company developed supplier mapping to help provide that visibility into affected suppliers, he said.

“Having that lesson learned, I think it helped us in 2017 with the suppliers that were affected, but it’s a constant learning process,” Mr. Gier said, adding that it is critical to have plans for replacing critical products such as raw materials because “it’s not as easy as replacing one widget with another.”

For the auto industry, there is not just a production exposure, but a shipping exposure, he said, citing the recent hailstorms in Texas that caused almost $1 billion insured damages.

“Those are the kinds of things that are very difficult to predict,” he said. “How you plan for a hailstorm is very different from how you plan for a hurricane or an earthquake.”

Assessing the supply chain risks is critical to understand the scope of the business interruption exposure, Mr. O’Donnell said.

In Puerto Rico during Hurricane Maria, for example, “the normal checks occurred,” he said. “The storm was so bad that there was disruption to things that were harder to predict” such as the lack of water needed for production purposes. “The change became so disruptive that the normal mitigation that would occur to get things back on track more quickly wasn’t working.”

The focus in 2017 for extreme events were on the hurricanes, which were “not particularly bad hurricanes from a loss perspective,” Mr. O’Donnell said. “Those were much more frequent losses one should expect to see as an insurer or reinsurer. When you look at what happened with the wildfires in California, we believe that is a much more remote event, and we believe that if you think about the likely impacts of climate change, many of them are resonant in the wildfires in a much more clearer way.”