Aon | helping clients manage the risks and opportunities from climate change

Climate change is one of the most perilous emerging risks of our time, impacting countless lives. The insurance industry can do much more than offering protection against physical damage. We spoke to Raphaëlle Vallet, Head of Climate Solutions & Innovation at Aon, about the role of insurance in mitigating climate risk.

A UK base with a global focus

Aon is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Set up two years ago, the firm’s multidisciplinary central climate function focuses on helping clients to manage risks and opportunities resulting from climate change and to accelerate their climate resilience. While Aon works with clients in over 120 countries, most of Aon’s central climate team members are based in the UK.

“The London Market is the largest commercial and specialist insurance market in the world, with 7.6% of global market share. Aon operates globally and transacts (re)insurance in many markets. For a number of complex deals in areas such as new technologies and emerging markets a lot of that capital we leverage for clients is reinsured or structured via London because of the market’s technical ability and wide range of platforms and expertise,” says Vallet.

[The UK] is a great place to have forward-thinking conversations

The UK is also attractive to Aon because of its appetite for innovation. “It’s a great place to have forward-thinking conversations,” says Vallet. She names the Lloyd’s Lab as one example of the ways in which the UK ecosystem accelerates and fosters new insurance products and solutions

Supporting businesses to adapt and grow

Aon focuses on supporting clients in three main areas: resilience, transition and growth.

Its resilience work involves undertaking granular data analysis to understand where climate risk is coming from, what it might look like (including translating it into financial terms) and how best to manage it. This resilience and adaptation work is also crucial to bringing down the cost of insurance and thereby improving access to it, particularly in high-risk areas such as California and Florida in the US.

Besides using traditional insurance to protect businesses’ physical assets, Aon is also developing solutions to help clients understand the impact of climate change on their employees’ health and resilience.

“Say you are a large UK company with a back office in Southeast Asia,” says Vallet. “What does that mean for your employees’ exposure to natural catastrophes and disasters? And what does it mean for your employees in London who are increasingly exposed to dangers such as air pollution? How does it impact business continuity and costs?”

Aon is already seeing clients affected by these concerns; for example, those in cities like New York that have seen employees hospitalised because of smoke from wildfires in Canada. “The cost of medical cover is sharply on the rise but many employers haven’t yet made the link between those rising costs and climate change” explains Vallet.

Aon’s climate transition work is focused on supporting clients to reduce the costs and volatility arising from the transition to net zero while also helping them embrace climate-positive strategies and practices such as regenerative agriculture. “As a firm we also work around reputation and liability risk, as that is a growing area,” says Vallet, “And we offer risk transfer and provide advisory services around things like TCFD reporting.”

Our job is to think about how we can use insurance and reinsurance mechanisms to de-risk some of these deals and therefore make them more investable.

Growth is perhaps a less obvious but essential focus for the insurance industry. “Insurance tends to talk about risk rather than opportunity, but we all want to support transition through deploying more capital into climate projects” says Vallet. “We need to unlock these opportunities for clients as a lot of climate investments are in emerging markets or new and unproven technologies and are therefore of higher risk. As a result, many of these investment opportunities do not make it through investors’ decision-making processes. Our job is to think about how we can use insurance and reinsurance mechanisms to de-risk some of these deals and therefore make them more investable.”

As part of these efforts, Aon is also developing ways to insure new technologies such as hydrogen and carbon capture and storage to de-risk investment in these projects.

Raising awareness of the role of insurance in the climate transition

Looking forward, the central climate team’s aims are firstly to work with other solutions teams across Aon to ensure clients have access to all relevant products and services; secondly to boost innovation across Aon and thirdly to raise awareness of the industry’s value proposition amongst public and private sector actors.

“Insurance traditionally engages with risk managers but we are increasingly also interacting with Chief Sustainability Officers and CFOs, especially in the finance space where these teams are often directly responsible for investing capital into new projects” says Vallet. “They don’t normally engage with the insurance market, so we need to educate them on the alternative possibilities for insurance and how that delivers specific benefits for them and their investments.”

There is more to do to educate the financial sector on how to make the most of these tools because banks are being asked to take on more risk against the transition. They can share the risk with insurers much more efficiently than they do currently. Our industry’s ability to support the transition is underestimated by policymakers.

This includes promoting the ways in which risk transfer can be used to reduce capital requirements for investors. “For example, we can utilise credit risk insurance to reduce capital requirements, which improves the financials of investments and frees up more capital for banks to funnel into climate projects,” explains Vallet.

“There is more to do to educate the financial sector on how to make the most of these tools because banks are being asked to take on more risk against the transition. They can share the risk with insurers much more efficiently than they do currently. Our industry’s ability to support the transition is underestimated by policymakers."

The importance of pushing policy forward

Vallet and her colleagues are keen to see policy pushes and guidance to corporations on articulating the implications of climate risk for both the business’ physical assets and people, as well as how they plan to manage and reduce those risks.

“The UK has been a pioneer in corporate governance and reporting; implementing TCFD is one of those examples of leadership,” she says. “Now I think we need to get to the next level by embedding adaptation and resilience objectives into financial regulation – the same model as net zero. Climate change is going to make a lot of assets uninsurable, and we need to get ahead of that.”