Physical Risks

Introduction to Physical Risks

Physical risk refers to the possibility of financial, social, and economic losses caused by natural disasters. Physical risks include not only damage to assets such as machinery and facilities due to unexpected natural disasters, but also business damage caused by bad weather. Physical risks can be caused by extreme weather conditions due to climate change, temperature rise, sea level rise, floods, typhoons, etc. This destroys physical capital, reduces the production of agricultural, livestock and fisheries products, and lowers labor productivity, resulting in a contraction of the real economy. If the real economy shrinks, it will inevitably adversely affect finance that invests in companies or provides loans.

Necessity of physical risk

1. Economic stability

Physical risks have a great impact on the economy, so it is important to prepare for disaster management and protection. Physical risks cause disruptions in production and supply networks, which also affect financial markets. Consumers cut back on consumption, hindering economic growth of the economy. Accordingly, companies should improve sustainability by preparing countermeasures such as reducing carbon emissions in preparation for resource shortages or production interruptions.

2. Protection of human life and safety

Climate change can cause serious natural disasters and have a great impact on humans and the natural environment. Drought or heat waves negatively affect crop and food production, and strong typhoons and heavy rains can destroy infrastructure and housing.

3. Environmental protection and sustainable development

Natural disasters and abnormal weather have a negative impact on ecosystems and biodiversity. To protect this, it is necessary to analyze and manage physical risks by taking measures for environmental protection and sustainable development such as the introduction of renewable energy and resource conservation.

Analysis of Climate Characteristics and Physical Risks in Korea

In the Korean Peninsula, the annual quantity distribution varies greatly by region, and it appears complicated depending on the topography and precipitation generation process. In particular, extreme weather indexes related to high temperatures such as heat wave days and tropical nights are expected to increase due to the warming of the Korean Peninsula, as well as extreme rain indexes such as heavy rain days and maximum rainfall on five days. About 90% of Korea's asset losses from natural disasters are heavy rains and typhoons that cause summer precipitation damage. Therefore, Korea's future climate shows that extreme climate phenomena can increase along with an increase in temperature and precipitation, so the Democratic Party of Korea cannot be relieved in terms of physical risks. Therefore, it is necessary to estimate expected losses due to increased physical risks in advance, and financial companies such as banks need to prepare proactive countermeasures to strengthen financial stability, and to conduct an in-depth analysis of domestic climate phenomena.