Weathering the storm

The devastating wildfires in California have once again placed climate-related risks at the forefront of discussions in boardrooms worldwide. 

Insurance giants such as Lloyd’s of London are forecasting billions in losses from these fires, while major insurers like State Farm are under scrutiny for controversial rate hikes in high-risk areas. The scale of financial impact and regulatory backlash from these climate-driven disasters are sending a clear message: climate risk is not a distant concern but a critical governance issue that demands immediate attention from directors.

New Zealand is not immune to these challenges. Rising sea levels, extreme weather events, and increasing exposure to natural disasters are already reshaping our insurance landscape. The questions facing directors today are not just about whether their businesses will be affected, but how prepared they are to mitigate, adapt, and respond to these risks.

Recent insights from Marsh McLennan’s 2024 Climate and Sustainability Insurer Survey confirm that climate-related risks are now deeply embedded in underwriting decisions across global insurance markets. Insurers are assessing businesses not only on their immediate risk profile but also on their long-term resilience strategies. Those failing to integrate sustainability into their governance frameworks may soon find themselves uninsurable or facing unsustainable cost increases for coverage.

Directors must recognise that the protection gap is widening, and businesses that are slow to adapt will bear the financial consequences. Marsh McLennan’s report on holistic risk management stresses the importance of proactive adaptation, rather than relying solely on financial protection measures. Yet, many organisations continue to take a reactive approach, dealing with climate impacts only once disaster strikes.

The financial reality of climate change has already hit home. The Auckland Anniversary Weekend floods in January 2023 and Cyclone Gabrielle in February 2023 were stark reminders of our vulnerability to climate-related disasters. The Auckland floods saw over 25 suburbs submerged, forced thousands from their homes and resulted in what the Insurance Council of New Zealand described as the highest number of weather-related insurance claims in history. Insurers struggled to keep up with the sheer volume of claims, with an estimated 40,000 claims – 10,000 vehicles alone being written-off.

Cyclone Gabrielle compounded these challenges, becoming the costliest tropical cyclone in Southern Hemisphere history with damages estimated at $14.5 billion including $3.18 billion in insured losses.

For directors, these developments present a clear imperative: climate risk can no longer be treated as an operational issue, it must be embedded into core governance and strategic decision making. 

The rising cost of insurance or, in some cases, the withdrawal of coverage altogether, is an early warning signal of what is to come. Businesses without robust risk management strategies will be the most vulnerable, not just to climate impacts but to financial instability, investor hesitancy and regulatory scrutiny.

The California wildfires, Auckland floods, and Cyclone Gabrielle have all sent the same message: climate risk is a real and immediate threat to financial stability. The question for directors is not whether they should act, but how quickly and effectively they can embed climate resilience into their governance frameworks.

Those who fail to act will face rising costs, operational disruption and increased regulatory scrutiny. Those who embrace climate-conscious governance will be better placed to navigate an increasingly unpredictable world.

Considerations for directors

• Integrate climate risk into governance – climate change is no longer an abstract future concern, it is a business risk affecting asset valuations, insurance costs, and market stability. Directors must ensure climate-related risks are regularly discussed at board level and embedded into decision-making.
• Develop comprehensive resilience strategies – boards must ensure their organisations are planning ahead, not just reacting. That includes understanding insurance coverage, strengthening supply chains and investing in infrastructure resilience.
• Engage with insurance partners – directors should be engaging with insurers now to understand risk profiles and coverage options. Businesses that can demonstrate strong climate risk mitigation strategies will be in a better position to secure insurance at manageable costs.
• Invest in sustainable practices – companies that prioritise climate-conscious decision-making, from emissions reductions to infrastructure upgrades, will be more attractive to insurers, investors, and regulators. Sustainable investment is not just about reputation; it is about financial survival.