Extreme Heat Poses Growing Business Risks, Insurers Race to Adapt
Climate change is bringing extreme heat events to the forefront, posing significant risks to businesses. Mercer has stepped in with a tool that assesses how these heat impacts affect companies' health insurance costs. Meanwhile, Cotality offers heat-hazard modeling, providing risk indices down to the address level. However, the financial impacts of extreme heat remain under-explored in climate risk models.
Last year saw record-breaking heat, with deadly heat waves in the U.S., including the 2021 heat dome in the Pacific Northwest. Insurers may struggle to keep up with these changes, leading to late perceptions of risk and potentially outsized payouts. To tackle this, Skyline Partners has developed metrics for a custom parametric insurance policy covering heat-stressed dairy cows.
Heat waves cause widespread economic damage, affecting sectors like farming, construction, and even data centers. California alone suffered $7.7 billion in economic harm from extreme heat events between 2013 and 2022. Hedging instruments like weather derivatives and parametric insurance can help mitigate these risks. However, Cotality's chronic-peril modeling tool, while offering risk indices for heat, doesn't yet estimate the monetary impact of heat events.
As extreme heat events become more frequent and severe, businesses need tools to quantify and manage these risks. Mercer's climate health cost forecaster and Cotality's heat-hazard modeling are steps in the right direction. However, more work is needed to fully understand and mitigate the financial impacts of extreme heat on businesses.
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