Understanding Extreme Heat: An Increasing Risk for People, Businesses and Society

Understanding Extreme Heat: An Increasing Risk for People, Businesses and Society
November 2, 2023 27 mins

Understanding Extreme Heat: An Increasing Risk for People, Businesses and Society

Understanding the impact of extreme heat on communities and businesses

In the wake of record-breaking high global temperatures in 2023, the rising frequency of extreme heat due to climate change creates an urgency for the risk industry to analyze climate trends for better risk mitigation.

Key Takeaways
  1. Of all perils, heatwaves pose the greatest threat to human health and life, causing more fatalities in the US than any other weather or climate-related peril.
  2. This rising frequency of extreme heat due to climate change creates an urgency for the risk industry, and businesses within the broader economy, to understand the diverse impacts of these events.
  3. Organizations spanning insurers to highly impacted sectors such as construction, agriculture and real estate need forward-looking diagnostics to help analyze climate trends and mitigate the risk.

Risk from chronic perils like extreme heat have traditionally been a blind spot in the insurance industry, despite the increasing cumulative costs of these events over time. However, with temperatures continuing to rise, companies are starting to take action to adjust their risk management strategies, while also responding to increasing regulation.

What are chronic perils? 

Chronic perils are driven by slowly evolving changes in temperature and rainfall patterns — such as heatwaves, drought and rising sea levels. The physical risk and impacts accumulate over a long period of time and are the result of a sustained or frequent exposure to increased hazard. 

Acute perils, on the other hand, are infrequent, short-acting events like earthquakes, hurricanes and tornadoes — perils traditionally analyzed and covered by the insurance industry. While these can often be more extreme, they are also less common, leading to the development of catastrophe models to provide a way of measuring and managing their impacts.

Why Act Now?

From increased heat and droughts to rising sea levels, the impact of climate change is felt around the world by communities, businesses and governments. Caused by long-term shifts in precipitation and temperature, these chronic perils are often overlooked by the insurance industry. However, the cumulative costs of frequent events over time can actually exceed1 losses from more extreme, but less frequent tail risk events. 

As climate change continues to increase the risk from chronic perils, Aon’s Chronic Peril Series explores the threat these hazards pose today and considers the influence of tomorrow’s climate on businesses: their operations, people and assets. This can then highlight how future-thinking firms should consider these hazards under their broader risk and growth strategies. In the wake of record-breaking high global temperatures, we kick off our series exploring the impact of heatwaves. 

A Year of Record Heat

Extreme heat reached record-breaking highs this past June – September, according to the National Oceanic and Atmospheric Administration’s (NOAA) 174-year climate record. In addition to the deadly heatwaves that swept across South America, Southeast Asia and Canada in the first half of the year, many densely populated countries in Europe and the U.S. saw prolonged, record-breaking heat. Sea surface temperatures in the North Atlantic this past summer also set record highs, prompting NOAA to increase its Atlantic hurricane outlook to “above normal” entering peak hurricane season. 

This rising frequency of extreme heat creates an urgency for the risk industry, as well as businesses within the broader economy, to understand the diverse impacts these events can have. Unlike acute perils, the full impacts from chronic perils like extreme heat are often cumulative and can be difficult to measure. This creates new opportunities for risk managers to leverage non-traditional risk transfer tools — like parametric insurance — to unlock flexible sources of capital.

The Business and Societal Impacts of Rising Temperatures 

Health Impact

The most devastating impact of extreme heat is on human health and life. In the United States and Australia, heat causes more deaths2 than any other weather-related peril3. Europe, too, has experienced the dire consequences of extreme heat. Aon’s 2023 Weather, Climate and Catastrophe Insight reported two separate major heatwaves in Europe in June and July of 2022. This affected hundreds of millions of people and led to nearly 20,000 heat-related fatalities, as derived from excess mortality rate data. Heat can cause death through a variety of ways, such as heat stroke, cardiovascular disease and respiratory failure. 

Extreme heat has significant indirect health effects as well. Heat and poor air quality are often grouped together, as the weather conditions conducive to heatwaves tend to also trap air pollution near the earth’s surface. Highly built areas tend to exacerbate heat impacts, as infrastructure retains and re-emits heat from the sun, making cities hotter than natural landscapes.

Business Impact

From a business perspective, extreme heat can have broad and sweeping effects that negatively impact operations, productivity and employee wellbeing. In industries like construction and agriculture, high temperatures and humidity cause worker fatigue, reducing labor productivity. Research suggests labor productivity losses in the U.S. from heat are already around $100 billion annually4 — a number that will surely increase in the future as the planet warms. Such economic losses are not just confined to outdoor industries either. Air conditioning is often too costly or impractical to implement widely in other sectors like manufacturing and warehousing. Heat poses direct risk to infrastructure as well, causing roadways and train tracks to buckle and fail in extreme cases, leading to transportation delays and supply chain disruption.

The Role of Climate Change

Anthropogenic climate change is increasing the frequency and intensity of heatwaves like those of 2023. While direct attribution of any single event to climate change is difficult, advances in attribution science are increasing researchers’ ability to assess to what extent climate change is influencing recent events. For instance, the recent extreme heat across North America, Europe and China this past year was made significantly more likely by climate change5. It’s clear that climate change is tipping the scales towards an increased probability of dangerous heat. 

In addition to the burning of fossil fuels, scientists point to the return of El Niño conditions as a secondary factor contributing to the severity of this year’s record heat. El Niño is the warm phase of the El Niño-Southern Oscillation (ENSO), a natural phenomenon characterized by anomalous warming in the central and eastern Pacific which also tends to increase the global average surface temperature. 

Heat: Amplifier of Other Perils

While climate change will likely increase the impacts of many individual perils, an even greater risk arguably comes from a growing number of compound events — multiple physical hazards occurring together, whose impacts are greater than either hazard acting alone. Prolonged bouts of extreme heat dry out soil and vegetation for instance, amplifying drought and wildfire risk. 

Such climate-driven compound events pose a unique challenge for risk quantification and mitigation efforts, which now need to consider the effects of multiple drivers operating on a range of scales with complex interactions. This points to new opportunities to leverage physics-based climate risk modeling to better understand how different perils evolve together in a warming world.  

Understanding the Evolving Risk

When asked about extreme heat, Praedicat, a liability emerging risk analytics company, noted that the largest driver of deaths from climate change will be extreme heat, which is more likely to impact casualty portfolios than property. Praedicat forecasts that large scale power outage combined with extreme heat could lead to billions of dollars of costs between workers compensation, general liability, and financial lines. For example, they developed a realistic 10-day heatwave scenario for the upper Midwest, with temperatures reaching levels consistent with a one-in-a-hundred-year event and where the power grid fails for multiple days under the increased load. The scenario results in over $20B in claims that could be covered under general liability policies held by nursing homes, habitational real estate, hospitals, and childcare facilities. On top of this, many states do not have occupational health standards for workers exposed to extreme heat, and the scenario produces $2.5B in workers compensation losses from outdoor workers killed by the heat or requiring hospital treatment for heat-related illnesses.  Losses on other lines, such as D&O, could also add $150M.  For general liability in particular, power continuity is the key; without the loss of power, the costs – both human and financial – are greatly reduced.
Praedicat notes that insurers can work with their clients to lessen the likelihood that heat waves lead to massive costs.  For example, an underwriter could inquire whether sensitive facilities like hospitals, nursing homes, and childcare centers have backup generators available and hooked up to their air conditioning units to keep their facilities cool during a heat-induced power failure.  Underwriters could also adjust rates for businesses served by power companies based on how much they have “hardened” their grids for extreme heat events.  Insurers may also want to avoid large geographic concentrations of industries likely to face liabilities during a heatwave – no different from avoiding geographic concentration for any other natural catastrophe.

Turning Data into Action

Data is at the heart of the solution. Organizations — from insurers to highly impacted sectors, such as construction, agriculture and real estate — need forward-looking diagnostics to help analyze climate trends, understand the impact on risk and use this information to adjust risk management strategies, while also responding to increasing regulation. This requires combining detailed climate information with claims data around employee compensation, healthcare and loss data from extreme heat, which is often difficult to measure or access.

A well-thought-out risk management framework identifies the full range of risks that could be faced by an organization and considers how these risks, and their cascading impacts, could affect strategic goals. This includes quantification of risk from chronic perils like extreme heat.

Tools like Aon’s Climate Risk Monitor help clients understand their risk to extreme heat and other climate-related perils, providing bespoke climate data and analytics to identify locations at risk and areas where risk profiles are expected to change most significantly. Since heat-related impacts are diverse, organizations can quantify heat risk through a variety of metrics and scores depending on the relevant use case, leveraging customizable analytics underpinned by the latest scientific understanding.

Three Ways to Get Started

As 2023 has proven, the threat of heatwaves is enduring across the globe. However, there are ways in which businesses and communities can adapt and mitigate the risk: 

1. Understand the current and projected impacts of extreme heat on your business, leveraging forward-looking data and analytics.
2. Make employee wellbeing a top priority to reduce health risks from extreme heat and build a more resilient workforce.
3. Be proactive by pursuing new opportunities to mitigate and adapt to climate change, such as green bonds investments and parametric insurance coverage. 

Learn how Aon’s Climate Risk Advisory team can help you make better informed decisions to mitigate heatwave and other climate-related risks. 

Aon’s Thought Leaders
  • Patrick Kelly
    Senior Associate Director, Climate Risk Advisory

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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