Climate risk: identify, quantify and manage physical climate risk
At the 2025 Airmic Conference, Torolf Hamm (pictured), senior director for physical risks in Willis Towers Watson’s climate practice, led a breakout session on the urgent challenge of managing physical climate risk. Hamm, who has worked in catastrophe risk since 2011, began by reflecting on how risk functions are increasingly following “a similar trajectory” to consultants in embedding climate into core risk management.
Key takeaways:
· Disclosures are increasingly mandatory and financially quantified.
· Physical climate risk is immediate: volatility is already driving losses.
· Captives can evolve beyond risk transfer, financing adaptation and transition.
· Stress testing, scenario analysis, and parametrics are critical tools.
The session offered what Hamm described as “a 360-degree view” of the drivers of climate risk, the regulatory and investor pressures accelerating disclosure and how organisations can adapt their financing and resilience strategies.
A central driver is regulation: “There’s a whole monster and a whole alphabet of climate disclosure requirements,” Hamm noted. Crucially, newer standards such as IFRS S1 require companies not only to disclose exposures but to “quantify the financial impact”, moving climate reporting beyond a “tick box exercise”. These disclosures, he explained, can also feed into risk financing and captives, turning compliance into strategic value.
Physical climate risks, distinct from transition risks, were the session’s main focus. Hamm stressed that climate volatility is already reshaping the landscape: “The extreme is becoming the norm.” He cited the 2023 Valencia floods as an example of cascading risks – heavy rainfall, elevated sea temperatures, impermeable soil and inadequate flood defences – turning a routine weather pattern into a “black swan-type event”. Similar dynamics are visible in river transport along the Rhine, droughts and heat stress, all of which have material consequences for assets, supply chains and people.
The widening gap between insured and economic losses is another major concern. Hamm warned of “a protection gap that’s emerging”, highlighting the need for risk managers to integrate climate stress testing into financial planning. Scenario analysis, informed by IPCC research, allows firms to model outcomes under both “middle of the road” and “hot-house world” pathways. Though not perfect, such stress testing provides a basis for decisions on premium allocation, capital allocation, and portfolio management.
The discussion also touched on captives. While Hamm admitted the industry is still “in its infancy”, he emphasised captives’ potential to support adaptation, invest in resilience and even finance carbon credit projects. One delegate noted regulators in Guernsey are already open to captives using capital to back carbon projects, creating a dual benefit of offsetting emissions and securing credits at favourable prices.
Adaptation was framed as essential alongside risk transfer. As Hamm explained: “It’s not always perhaps the right way… building a concrete flood wall might not be the right solution.” Sustainable, nature-based measures may be more effective and align with the regulatory principle of “double materiality” – acknowledging both how climate affects the company and how the company affects the environment.
Parametric insurance solutions were also explored, particularly for “non-traditional” risks such as drought or extreme heat. By triggering payouts based on objective thresholds, these products can help fill gaps where conventional insurance is insufficient.
Hamm closed by urging risk managers to embrace data and analytics, overlay climate scenarios on portfolios and identify “the pinch points” most exposed. The key, he argued, is to move from compliance-driven disclosure to proactive integration: “If you’re getting this right, you could do this in a cost-effective way… in a more volatile environment.”
As one delegate summarised, the real challenge is bridging the growing gap between economic and insured losses – and captives could be central in designing those solutions.
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