Diversification has long been the mantra of portfolio management: spread assets, reduce risk. Yet climate hazards rarely operate in isolation. They cluster, amplify, and cascade. What appears diversified on paper can, in reality, be highly correlated under stress.

Munich Re’s NatCatSERVICE data demonstrates the point. The assumption that flood, storm, wildfire, or drought exposures balance each other out is outdated. In 2024 alone, natural disasters caused US$ 320 billion in overall losses, of which approximately US$ 140 billion were insured – the third-highest insured loss year since 1980. These figures show that “diversification” offers little protection when hazards converge.

Traditional financial models assume hazards are largely independent. The climate, however, does not play by those rules.

• Heat, drought, and wildfire: Prolonged drought dries vegetation; heatwaves intensify aridity; a single spark ignites large-scale wildfires.
• Heat and infrastructure stress: Extreme heat places pressure on electricity grids, transport networks, and supply chains. Financial losses are amplified across entire regions.

These are not isolated events but interconnected dominoes. One hazard accelerates another, and portfolios bear the compounded cost.

With Location Risk Intelligence, portfolio managers can precisely view such overlaps. The platform allows them to screen single assets or entire portfolios for multiple hazards, toggle defended and undefended scenarios, and explore seasonal correlations such as heat stress coinciding with wildfire risk.

This multiple-hazard trend is more than a hypothesis; it is documented by loss data.

• The Ahr Valley flood in Germany (2021) was not merely heavy rainfall. It combined hydrological extremes with insufficient infrastructure resilience, resulting in €8.5 billion in insured losses and over €30 billion in public reconstruction funding.
• Australia’s 2019–2020 bushfires followed record drought and heat anomalies, producing cascading social, environmental, and financial consequences.

NatCatSERVICE shows that such compound and connected events are increasing in both frequency and severity. LRI translates these findings into detailed hazard indices and forward-looking scenarios. Users thus understand where individual risks are as well as how they interact.

For financial institutions, correlated hazards create hidden fragility:

• Investors overestimate diversification and remain exposed to clustered hazard impacts.
• Banks underestimate correlated defaults when collateral impairment affects whole regions simultaneously.
• Insurers face simultaneous claims across perils, stretching reinsurance and solvency buffers.

What appears as spread risk can, in fact, be concentrated exposure under another name. Using the portfolio aggregation and comparison functions of Location Risk Intelligence, these concentrations become visible, quantifiable, and actionable.

With Munich Re’s Location Risk Intelligence, users can evaluate multiple climate-related hazards. For example:

• Interconnected perils in the same region, such as storm, river surge, and flooding.
• Systemic fragility linked to infrastructure, value chains, and supply networks.

By combining more than 140 years of loss intelligence with forward-looking IPCC scenarios to 2100, Location Risk Intelligence delivers hazard scores, return-period intensities, and financial impact metrics. The Climate Change Edition captures physical hazard projections, while the Climate Financial Impact Edition quantifies expected annual loss and one-in-one-hundred-year damage for both assets and aggregated portfolios.

Data and analyses from Location Risk Intelligence are available via web interface or API. Organisations can integrate these detailed insights directly into underwriting, lending, reporting, and capital allocation decisions.

Diversification only works when risks are independent. Climate hazards do not give us that luxury.

At Risk Management Partners, our data shows why correlation can quietly erode portfolios. With Location Risk Intelligence, firms can anticipate where compound exposures will emerge and quantify the financial consequences. These companies manage fragility before it turns into catastrophe.