Aon: Growth in a Time of Climate Change
Valuing intellectual property and tackling the risk of climate change will provide plenty of opportunity for insurers and reinsurers to work with business and government, says Joe Monaghan, Aon’s recently appointed Global Growth leader.
Looking ahead, there is significant opportunity for the insurance sector to work with business and governments. At Aon’s Global Growth team, we have the ability to draw insights from our global scale and see the issues and challenges facing our clients but also new, additional sources of capital.
One of the areas we are particularly interested in as one of these sources for capital, and for future growth potential, is investment in intellectual property.
Our data shows that over 85% of the value of the S&P 500 is solely in intangible assets —intellectual property and copyrights. Many of the companies one sees in the financial press are powered by intellectual capital, and that capital is monetised and, for the moment, uninsured.
This suggests significant growth potential and at Aon, we have invested heavily in capabilities that allow us to value this intellectual property in a state-of-the-art fashion. Once it is possible to value this property and understand the volatility of those values, we can work on creating novel insurance products for clients which allow them greater liberation and monetisation of that intellectual property.
Another area that stands out for future potential growth is climate change, an almost unavoidable topic. Over the last 12 to 18 months, we have seen companies make a significant number of commitments to reach a level of carbon neutrality by a set date. As climate changes start to affect both the frequency and severity of extreme weather events, insurers and reinsurers will start to consider their balance sheets not only for the risk they are already taking, but also how they feel about that risk going into the future.
Insurers who have very large asset portfolios may also be considering changing their investment guidelines within an ESG construct. But this brings us to another area for potential growth, which is the role insurers can play in helping companies through their ESG transitions.
Our data shows that over 85% of the value of the S&P 500 is solely in intangible assets —intellectual property and copyrights.
Europe has been leading the way from a regulatory standpoint, making disclosures on climate change exposure compulsory. But it is happening globally, and at Aon, we are heavily engaged with regulators around the world to help them understand how to assess exposure risks, especially with regards from the physical damage standpoint, with the increased frequency and severity of extreme weather.
At Aon, we’ve made investments in partnerships with institutions such as Columbia University to increase our ability and understanding in climate change exposure. We already have a strong starting point, however, thanks to the investments we have made over the last 25 to 30 years in more effective modelling of natural disaster risks.
The US Securities and Exchange Commission (SEC) has recently been pushing not only for additional mandatory disclosures of climate exposure, but also the tracking of companies’ progress on the commitments they’ve made to net neutrality.
The SEC recently released a sample letter of the types of questions they’ll be asking of the companies they regulate. It included disclosures on the severity of weather, such as floods and hurricanes, sea levels, arability of farmland and stream fires, and water availability and quality. The letter would also require disclosures on how weather affected by climate change might damage the company’s property or operations.
The sample letter also required disclosures about the purchase of carbon credits and offsets which can materially affect a business and its financial condition.
There is a role for insurers and reinsurers to play in all this, not only in helping companies through this transition and quantifying and mitigating the exposures, but also in decarbonisation and carbon credits, an area still largely in its infancy. These transaction can have a lot of risk, but much of which can be mitigated by insurance.
In the conversations we’ve been having with governments, alongside these mandatory disclosures, they are also looking for ways to partner with the private sector and private capital to mitigate risk, especially in the areas of climate change and extreme weather.
However, there are challenges they face in doing so. These often revolve around the government’s different incentives and its balance with the need the private sector has to make sure they are generating adequate returns on their capital for shareholders.
Governments want to understand the knowledge and experience the insurance marketplace has in assessing the volatility of extreme weather and how it will change due to the effects of climate change. This is very much a developing science, and it is not just us at Aon who are investing heavily; the insurance industry as a whole is working very hard to understand how we should adapt our models to take into consideration climate change.
The other area that governments are focused on is public private partnerships and where insurance capital can augment the safety system, especially as they are investing in physical adaptation to protect communities from the future effects of climate change.
For instance, if a government plans to build flood mitigation to protect a community previously exposed to flooding, it wants to know how insurance can help with that project and reduce the risk to the taxpayer. And once that project is completed, it then wants to know what insurance can do to reduce the cost of protecting those assets for the future.