Aon talks tackling climate change challenges

The topic of climate change has continued to grow in importance, with people trying to get a handle on what is actually happening, according to Steve Bowen, managing director and head of catastrophe insight at Aon.

But it’s crucial to understand that when we talk about climate change, it’s not necessarily in the future tense—we’re seeing the effects of climate change today.

In 2021, he said, there have been numerous examples of weather-related disasters and it’s “pretty obvious those climate change fingerprints are clearly seen” on many of these disasters.

Bowen was speaking to the Re/insurance Lounge, Intelligent Insurer’s digital hub for interviews, debates and panel discussions.

In late October, Aon released “ Real-Time Climate Change”, a report focused on three recent examples of key perils that “already show the fingerprints of climate change”.

Three threats

First, the report looks at tropical cyclone risk, citing Hurricane Ida as the latest tropical cyclone event to show behavioural change prior to making landfall and after coming ashore.

“Hurricane Ida was another example of the fact that tropical cyclone risk is no longer just a coastal concern,” said Bowen.

“We have to think about and recognise that impacts are going to be further inland as storms are slower to decay inland, or a slower forward motion post-landfall may bring a significant amount of inland rainfall which can lead to substantial inland flood risk.”

On flood risk, Bowen added the report focused on what happened in Europe this summer, along with a historic flood event in China.

“For the German insurance market, we’re likely to be looking at the costliest industry event on record. The flood impacts from storm Bernd resulted in excess of $10 billion of insured loss,” he said, adding that the significant rainfall “highlighted the vulnerabilities of infrastructure not able to handle the volume of water that fell in a short period of time”.

Less than a week after the European floods, nearly an entire year’s worth of rain fell in an hour in parts of China’s Henan province.

Bowen added that this was the costliest weather-related loss for the Chinese insurance market in history.

Third, the Aon report discussed wildfire risk, noting that while the US is no stranger to large fire events, the peril has “taken a dramatic and costly turn in the past decade”.

Bowen said: “It was another very active season across the American west. From a loss standpoint, we certainly have not seen losses on par with 2017, 2018 and 2020 but it was another multi-billion-dollar year for the industry.”

He added that the seasonality of wildfire risk is changing, and could be “almost a calendar year risk” now. Indeed, the California Department of Forestry and Fire Protection recently declared the term “fire season” outdated as wildfire risk is now prevalent during the full calendar year.

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Reevaluation of risk

According to Bowen, climate change-related losses are increasing, driven partly by the hazard itself and by the fact that more people are moving into highly vulnerable areas.

“Because of that, there’s going to have to be a re-evaluation of the risk for different regions,” said Bowen, adding that the industry must recognise that the risk does not just exist at the point of impact.

He said: “We’re now seeing in real time that these climate change-influenced events can have significant, and at times cascading, effects on areas around the world. We’ve seen it most notably with supply chain challenges, although these compounded and concurrent events are leading to non-negligible secondary and tertiary losses.”

Bowen believes that the industry as a whole is having to take a step back and recognise that the risk is certainly much broader than it realised before.

He advised that the industry should focus on preparation, mitigation and working with governmental bodies to modernise infrastructure and limit risk in high risk areas.

And, while climate change is undoubtedly a big challenge, it has also created opportunity. When you look at the protection gap, we continue to see a significant portion of these increasing losses going uninsured, said Bowen.

He added that this includes very mature insurance markets such as the US where, in most cases, with large flood events the majority of those losses end up being uninsured.

The flooding in British Colombia, Canada, and Washington State in the US demonstrates a huge disparity in terms of flood insurance. According to Bowen, only 1 percent of residential homeowners in the US have insurance while, in Canada, homeowner flood policy is available and nearly half of British Colombia homeowners have taken up that offer.

Additionally, climate risk for some of the most vulnerable areas on earth tends to be in some of the poorest areas, said Bowen, where insurance penetration is quite low.

“An opportunity exists for the industry to be working with governments to set up parametric-based approaches and looking at other options, such as programmes focused on catastrophe bonds,” he said, adding that insurers will be expanding the insurance pool.

Aon is trying to help companies get a better view and sense of where the risk is evolving, including “where on the ground the various governmental, regulatory, and rating agency requirements are becoming more pronounced”.

Every business is taking steps forward on climate change and environmental, social and corporate governance factors. While some may be still at the starting gate, said Bowen, following on from COP26 in the UK there is a “real momentum to continue to see more of these types of solutions to help companies feel more comfortable with what’s going on in the climate space but also have some actionable ideas and things that people can do to implement into their business strategies”.

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Steve Bowen is managing director and head of catastrophe insight at Aon. He can be contacted at: steven.bowen@aon.com