In late November, Zurich North America went live with an interactive climate resilience tool that is designed to help insureds better understand their risk exposures in real time. Dan Reynolds, the editor in chief of Risk & Insurance recently spoke with Arooran “Aroo” Sivasubramaniam, who is the Head of Zurich Resilience Solutions. What follows is a transcript of that discussion, edited for length and clarity.

Risk & Insurance: Thanks for meeting with us, Aroo. What progress has Zurich made on its new resilience tool, and how did the idea for it originate?

Aroo Sivasubramaniam: My pleasure to speak with you Dan. The idea for our new resilience tool came about a couple of years ago when we were meeting with a large multinational customer. As we were discussing their risk profile and sharing how we analyze their portfolio, including losses and exposures, the risk manager immediately asked if they could have access to the tool we were using. They were impressed by how we presented the information.

From there, we took the existing tools we had in-house, enhanced them, and made them more user-friendly. The primary goal of the tool is to help decision-makers, such as senior managers and board members, make capital allocation decisions and build a competitive advantage in the marketplace.

The tool takes all the assets and information provided by the customer, such as physical assets like buildings, employees, revenue, and profit, and merges it with our own proprietary data. This includes over 150 years of claims information and our own flood and wildfire maps. With this, we can help customers understand their exposure to extreme weather and climate risk over short, medium, and long-term periods, extrapolating across multiple extreme weather events and perils.

Our tool goes beyond what is currently available in the market, which often uses publicly available data and may only cover 3 to 5 perils at most. We cover more than 10 perils and are continually expanding. The tool allows leaders to see how a specific location’s exposure to extreme weather and climate evolves over time, using the UN’s IPCC scenarios.

For example, a food producer might discover that a particular manufacturing location could face severe drought or extreme heat in the medium term, around 2050-2060. This could significantly impact their water input, a key component in food manufacturing. By identifying such risks early, they can strategically move production to another location, avoiding potential disruptions and reputational damage.

We believe this tool can help leaders make strong strategic decisions, enabling them to thrive during stressful scenarios while their competition stagnates or declines. Much like how the COVID-19 pandemic differentiated market leaders from the rest, our resilience tool can help businesses build and strengthen their competitive advantage.

R&I: Is access to the tool limited to existing Zurich customers?

AS: Zurich Resilient Solutions operates as a separate brand, allowing us to serve a diverse customer base beyond Zurich Insurance customers. While existing Zurich customers will have immediate access to the solution upon purchase, we are not exclusively tied to them.

We actively engage with the open market, supporting individual customers, municipalities, brokers, and investment companies. Our services extend to evaluating the exposure of entire asset portfolios. This broad spectrum of customers enables us to provide comprehensive risk management solutions tailored to various needs.

R&I: Misunderstanding risk can of course add to what we refer to as the insurance gap. How severe is the insurance gap, in your view?

AS: A recent study from September suggested a roughly 50% gap between the insurance need and what’s actually purchased. This study took into account some economic damages, but it’s important to note that quantifying economic damages is often a rough estimate.

There are many downstream impacts to consider. The company itself suffers damages, such as lost opportunities and customers, as well as reputational harm. Competitors may gain an advantage during this time. Significant effort is required to make up for these losses.

Moreover, if companies struggle to recover, it can lead to dislocation in the community. People may lose jobs, hindering their ability to thrive, build, and grow. This opportunity cost is substantial and often highly underestimated.

The study alluded to a $500 billion gap, but I  suspect it could be much more. The indirect consequences are the ones that people often overlook, and that’s where the most significant underestimation occurs. While undervaluing property is a factor, it’s relatively minor compared to these indirect consequences.

R&I: So what I think you are saying is that business interruption costs and secondary and tertiary effects should be considered in quantifying the insurance gap.

AS: We strongly believe that business interruption costs, as well as secondary and tertiary effects, are a significant part of the insurance gap. At Zurich, we have been creating Zurich Resilience Solutions (ZRS) to address this issue. ZRS aims to proactively mitigate risks before a loss occurs, which we believe is more meaningful to customers, investors, and owners, as it helps build resilience and enables companies to thrive past an insurable event.

The severity of a loss remains the same regardless of whether you have insurance or not. Therefore, it is crucial to avoid the loss altogether and minimize downtime. As a business owner, any downtime can be incredibly stressful, leading to potential loss of customers, upset investors, and disgruntled employees.

In extreme cases, if the situation is not handled well, it may result in voluntary or involuntary loss of employment. Our goal with ZRS is to prevent such scenarios by implementing targeted solutions that enhance resilience and minimize the impact of potential losses.

R&I: When did Zurich North America’s digital climate tool go live?

AS: The tool went live on November 27th. The tool is designed to help businesses assess and manage their climate-related risks, providing insights and recommendations based on their specific needs and circumstances.

The launch of this innovative tool demonstrates Zurich North America’s commitment to supporting its clients in navigating the complex challenges posed by climate change. By leveraging cutting-edge technology and data analytics, the company aims to empower businesses to make informed decisions and develop effective strategies for mitigating climate risks.

R&I: What kind of traction and reception has the initiative received so far?

AS: While I don’t have all the numbers yet, as it’s been less than a week since launch, we’ve seen significant traction and engagement. On social media, particularly LinkedIn, the videos we launched have been viewed thousands of times.

For example, the link I personally shared has already garnered 2,200 views at last check. However, we still need to collect and aggregate numbers across all our regions, including the US, Canada, and globally, to get a comprehensive picture of the reception.

R&I: What risk management tools or trends do you find particularly interesting or necessary in the current market?

AS: This dynamic environment emphasizes the need for effective risk management. While many carriers offer various propositions, it’s crucial to use capital and cash wisely to avoid downtimes and make informed decisions. News reports frequently highlight the occurrence of natural disasters such as wildfires, freezes, hurricanes, and tornadoes, and we observe an increase in both frequency and severity in the numbers.

One fascinating insight from the tool we saw, Dan, was the interaction between risks. We often think of risks in silos, such as hurricane losses, but it’s important to consider how one risk can impact another. For example, how does a hurricane affect fire exposure? Or how does increased precipitation lead to general water damage?

We’ve seen instances where customers outside the hurricane zone experienced severe fire damage due to increased precipitation causing water to enter places it shouldn’t. In manufacturing facilities, this can lead to disasters like hot oil spills. Another example is the city of Valencia, where rain led to floods and mudslides.

In some locations, customers face more frequent and severe hail damage due to increased precipitation over time. The buildings, originally built to withstand a certain level of hail, could no longer handle the intensified conditions. Projections showed that without swift changes to their roofing, they could face physical damage and business interruption losses exceeding $100 million by 2030 or 2050 in the most extreme cases.

R&I: What are your thoughts on the current risk management landscape, particularly for middle market and SME companies, beyond the scope of the Aru tool?

AS: When it comes to risk management for middle market and SME companies, cyber security and extreme weather events are two of the most critical concerns. Unlike large corporations, which have their own internal security operations centers monitoring their systems constantly, middle market and SME companies often lack these capabilities.

As a result, when faced with a cyber event, whether it’s a fake president email or a hack,  smaller companies are often at a loss, requiring significant expertise and support to build their resilience. Similarly, they may not have invested enough in preparing for extreme weather events.

At Zurich North America, we focus on providing the necessary support and resources to help middle market companies navigate these challenges. While different from climate or extreme weather risks, cyber security is equally crucial for middle market and SME companies, as they often lack the awareness and knowledge to handle such threats effectively.

R&I: Do you share with us the view that insurers are becoming more aware of business opportunities in the small and medium-sized enterprise (SME) market, and what strategies are they employing to capitalize on these opportunities?

AS: Insurance companies are increasingly recognizing the potential in the SME and middle market segments, as evidenced by the growing frequency of these terms in investor calls over the past five years. Traditionally, insurance has provided more tactical, post-loss support.

However, we are transforming our approach to be more proactive, aiming to prevent losses from occurring in the first place. By engaging with clients at the boardroom level, we can help them navigate the dynamic and challenging business environment, rather than simply providing support after an incident has occurred.

This shift in strategy allows us to offer value beyond just financial protection, positioning insurance as a strategic partner in helping businesses mitigate risks and achieve their goals amidst the ever-changing landscape. &