Climate-related perils must become a focus: Aon

The risk transfer industry should start thinking in terms of climate-related perils, do more to understand the primary and secondary risks around them and take a different approach to the way risk models are built and used.

That is according to Dan Dick, executive managing director at Aon, speaking to APCIA Today in an interview also available on the 1.1 Club, Intelligent Insurer’s online platform for interviews with industry leaders.

Dick, who is also global head of property analytics at Aon’s Reinsurance Solutions, believes that a new approach is required by the industry—one that accepts that a number of different risks and perils are heavily influenced by climate change.

“We should be thinking climate perils and considering how a number of things from wildfires and hurricanes to winter storms and convective storms are being impacted in terms of their frequency and severity.

“We need to think on an aggregate basis and examine how these events play out over the course of a year,” he said.

Understanding the perils

Speaking about wildfires specifically, Dick said there is little doubt that climate change has been an exacerbating factor in the extent of the losses over the past decade, especially when the many different parts of the world hit by wildfires recently including Greece and Australia—in addition to California—are considered.

“We have seen a lot more in the last 10 years, which has been exacerbated by climate change. The warmer conditions in the western half of the US is a catalyst of these events.

“We have also seen wildfires in other parts of the country, and people are becoming much more knowledgeable about the potential impact of what have always been referred to as ‘secondary perils’. Maybe we should be calling them ‘climate perils’,” he said.

He notes that, despite some catastrophic fires in 2021, the loss year will likely be close to the 10-year average. He believes insured losses will be around $2 billion this year, with three million acres burned. While that is higher than historic levels, it will be much lower than some of the most severe years, including 2017 and 2019 when losses reached $17 billion in each year, and in 2020 when losses were some $10 billion.

These experiences have improved the industry’s understanding of this peril. Dick explains that the industry is much better at understanding how the specific climate of a year impacts the risk, much better at grasping the potential burn scope, and much better at understanding many other risk factors including the construction and maintenance of properties.

“There are many more risk factors that we can factor-in now, and we have realised that we need a much deeper knowledge on individual risks,” he explained.

“Many of those factors were not considered in models five years ago but, in the same way as we have adapted hurricane models over time, that knowledge is there now.”

Dick adds that government support is still needed, and this is a risk that requires deep collaboration for it to be properly managed.

“Things such as preventive maintenance and clearing, which will reduce and mitigate potential losses, come with a cost, and that needs to be borne by government,” he said.

“There is also another set of issues to discuss, on causation. But governments have come a long way on risk mitigation and areas such as building codes.”

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Factoring climate change in

For the risk transfer industry, there is a bigger issue: how to grasp the many different ways climate change needs to be factored into different risks. Many secondary risks can emerge, which are not immediately obvious. He cited the example of wildfires leaving burn scars which later, after several days of heavy precipitation, can lead to mudslides and hill collapses, causing secondary losses.

Aon is taking a different approach. On wind risks, the broker has partnered with Columbia University, which is building future event sets to integrate that data into Aon’s Impact Forecasting unit’s catastrophe model.

The idea is that it will generate a number of different future scenarios around certain risks based on predictions around how events might behave, rather than historical data alone.

Aon is now taking the same approach with wildfire risk. Dick says the firm will shortly announce a similar partnership with a number of California universities. The aim is to develop a brand new view of future risks based on climate change rather than looking back.

“We think this will be a differentiator in this market,” Dick said.

In terms of some of the other current major talking points, he says that social and general inflation are likely to be high up the agenda at the APCIA meeting.

“We saw a massive spike in cost of product on rebuilding after COVID-19,” he said. “It is our job to consider what other parts of the loss equation need to be addressed and help clients adjust their businesses accordingly.”

“It is not only what modelling agencies and insurers can do around risk—there are also the new partners driven by technology. We are always looking at how they are assessing risk and what we can learn from that. It is about taking many disparate sources of information to make the best possible decision,” he concluded.

To view the full 1.1 Club interview click here