Aon has been involved in the climate space for some years now, so could you tell me what prompted the launch of Climate Risk Advisory?
Over the past several years we've been seeing an increasing need across a broader set of Aon clients to get more in-depth catastrophe and climate insights embedded in their organisation. That’s been driven significantly by regulatory action, by investor questions, and by rating agencies which are starting to really look at climate change.
The need to disclose climate-related impacts will impact every organization who participates in our economy across a wide spectrum of industries. One area of significant focus is on financial institutions, mortgage lenders and commercial loans that might have climate risk embedded in them that is not being quantified or communicated appropriately.
It became such an obvious unmet client need we decided it has to be an official aim and a primary focus for Aon.
Aon’s Impact Forecasting team has developed a suite of catastrophe models for a range of perils and geographies; could you tell me how Climate Risk Advisory utilises those capabilities, and also about Aon’s global academic partnerships?
One of the benefits that Aon has is, not only do we have access to a wide variety of partners in catastrophe and climate modelling, we have our own in-house modelling team that's developing an independent view of risk. We can look that model view, alongside other vendors, to help our clients really adapt a multimodal view of climate risk.
The use of Impact Forecasting allows us to look under the hood of models to try to help our clients understand the impacts of various assumptions on the hazard model or the impact on the vulnerability model and financial model and make adjustments to those assumptions that better reflects the organisation that we may be working with.
That ability becomes increasingly important as we're starting to talk to a wider set of clients in the commercial risk space.
In terms of the academic partnerships, these enable us to continue to evolve our thinking. We also recognise that there is active research examining the impact of more carbon in the atmosphere and we want to find ways to bring this academic research to our clients more quickly and help to fund the advancement of this understanding for all players.
You’re now working with public sector and financial institutions entities. How has this new set of organisations responded to Aon’s solutions? And what has Aon learnt from these engagements? Could you tell us about any successes?
Over the past several years we’ve seen increasing interest from both public sector and financial institutions in what has been – up until now – traditionally insurance-based analytics around catastrophe and climate risks. These sectors are naturally exposed to physical climate risks because of their longer-term investments in hard assets, whether they be public infrastructure with long engineered design lives, or residential loans on the order of decades.
For both sectors, climate has to date largely been a risk that can either be affordably transferred to the insurance market or comfortably retained. However, with an increasing risk profile across multiple geographies, combined with insurance affordability pressures, climate risk is now becoming a larger part of up-front investment and loan decision making.
Most of the conversations we’ve had to date begin with a future climate lens, but quickly fall back onto helping these organisations understand the materiality of present-day weather and climate to their business. If you get the present-day risk view right, future climate projections become far more informative.
For example, we are working with several of the Tier 1 banks in Australia to help them integrate climate risk into their own credit risk modelling. Annualised loss costs can be used as a proxy for the reduction in market value of an un- or under-insured property over the lifetime of a loan, which can feed directly into PD [probability of default] and credit risk modelling.
For public sector clients, the focus is more on leveraging these analytics to help build resilience into either legacy assets or to undertake due diligence for new developments. For example, we’re currently working with government clients to support cost benefit analyses of where best to raise flood defence levels or property floor heights to reduce flood risk and inform planning policy.
Where do clients need the most assistance in terms of assessing and mitigating climate risk, and building business resilience?
Most clients are early in their journey, so they need to undertake an ERM (Enterprise Risk Management)-like approach for climate change. We help breakdown the internal organisational challenges around climate change and identify data providers to feed into risk management. We can also help them understand how each of their teams can use the climate data they receive.
How will Climate Risk Advisory develop in 2024 – where do you plan to augment your capabilities?
There are two big areas of focus for us. Aon is repositioning climate analytics across our Risk Capital organization. We’ve created fresh teams to focus holistically on Risk Capital which was driven by the need to create solutions across that set of clients in a consistent way. We’re also focused on emerging risks and one key area is climate litigation and liability risks. We do see an increasing need for analytics and risk transfer capabilities to help organisations to manage political litigation related to climate change.