From Net Zero to Hero
An extant concern for many insurers and reinsurers is how to achieve net zero carbon emissions—and defining what that means within a business. This is the view of Aon senior managing director Liz Henderson, who said that while the goal is achieving net zero emissions, many carriers are increasingly examining the wider meaning of this in the context of their entire underwriting portfolio.
“That pledge of net zero will increasingly be applied to deeper business decisions, including within the underwriting portfolio. At a high level, this will mean looking at the carbon footprint of customers and potentially how to manage or offset that. I think we will see re/insurers becoming more sophisticated in how they manage this,” she explained during a 1.1 Club interview.
Henderson, a specialist in catastrophe and climate analytics for Aon, says that there is another aspect to managing climate change that is less discussed—but which could open a major opportunity for the industry.
“As the world commits to decarbonisation, that will mean more investment in new technologies. Some industries and companies will thrive and expand while others will diminish,” she said.
“That pledge of net zero will increasingly be applied to deeper business decisions, including within the underwriting portfolio.” Liz Henderson, Aon
This volatility in the future global economy will create a need for risk transfer and present an opportunity for innovative carriers and brokers.
“The industry will have a role in enabling that technology by removing some of the uncertainty and volatility. For example, Aon excels at understanding risk and securing capital to meet that risk, reducing volatility in the process.
“We understand risk: physical risks, as these may be affected by climate change, and also the transitional risks we will be seeing in years to come as winners and losers emerge from the move to reduce carbon emissions.
“Insurers have an important role to play in enabling that transition and we will be firing on all cylinders to meet that rising demand,” Henderson said.
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Modelling progress
A growing gap is emerging between the parameters risk models use to assess secondary perils and the reality of the risk in the context of climate change.
Henderson, who leads Aon’s climate change analytics strategy for insurers, says she works with clients to help them better understand the volatility brought by climate change as well as helping them develop their pricing and underwriting strategies and how their reinsurance programmes complement this.
“From a scientific perspective, it is hard to quantify the exact impact of climate change on any one event but there is no doubt that, overall, we are seeing an increase in the frequency and severity of events driven by a more volatile weather cycle,” she said.
“The question is how much of this volatility is being captured by the modelling tools? Where there is a widening gap between the outputs of these tools and real-life experience, that is a concern. The next question is how that experience, and those concerns, are having an impact on the way the markets are quantifying that risk and pricing it.”
“Such cat events are costing more because of other reasons including labour and supply costs.”
Henderson said that Aon had started to implement climate change considerations into its Impact Forecasting modelling suite, particularly for Florida hurricane.
She added that the two secondary perils around which there is most focus are wildfire risks and severe convective storms. “We have been seeing a lot of losses from these and the concern is the models have not been updated to account for the most recent experience, resulting in that gap in the modelling.
“Much more research is needed on the impact that climate change is having and will have on these perils,” she said.
While Henderson expects to be discussing climate change and related issues during APCIA, she notes that there are other burning issues for the industry. Central to many renewal discussions will be some of the wider issues around increasing costs, including the theme of social inflation.
“The severity and frequency of cat losses are a big concern, but such cat events are costing more because of other reasons including labour and supply costs,” she said.
“We are looking at this with clients and examining how to get the tools to better understand the trends.
“It will be great to have these discussions in person, and we are looking forward to seeing clients again.”
To view the full 1.1 Club interview click here
Liz Henderson is a senior managing director at Aon. She can be contacted at: elizabeth.henderson@aon.com
