Re/insurers can help solve challenge of ‘chronic climate risk’: Aon

Re/insurers can capitalise on a growing capital efficiency gap caused by the impact of climate change if they can educate buyers and develop products able to solve some of these challenges, according to Greg Lowe, global head of resilience and sustainability at Aon, in a new report called ‘Weather volatility and chronic climate risk: a growing capital efficiency gap.’

Lowe, who also heads Aon’s Weather and Climate Risk Innovation platform that brings together industry leading capabilities in alternative risk transfer to non-traditional climate risks, says that so-called ‘chronic’ climate risks are a growing challenge for businesses and societies, yet the majority of the resultant economic losses are not measured and few of them are insured.

He notes that Aon’s own Weather, Climate, and Catastrophe Insight report highlights that the sixth biggest economic loss and eight largest insured loss of 2017 was a drought event. Managing these risks requires a better understanding of their impact to drive demand for insurance protection.

“Investors and regulators are providing the landscape for demand, with data and analytics facilitating the strategy and decision-making. Yet there is still the need for further education for the market,” he said.

“Buyers of insurance are often unfamiliar with derivatives and alternative risk transfer products. The entire industry needs to offer clear guidance on how these products work. Closing a capital efficiency gap is about using the right tool for the given efficiency frontier of company’s risk appetite.”

He defines chronic climate risk is the creeping change in weather patterns that cumulatively add up and impact financial performance. “It is frequently described as ‘death by one thousand cuts’. Unless these risks are quantified, and the products are well-understood by buyers and wider financial markets, demand will not be adequate,” he said.

“Ratings agencies are making it clear: these risks have material impacts. The opportunities for the industry to grow available capital for the weather insurance market are ripe; with the right supporting infrastructure and with the landscape quickly evolving, competition is likely to grow.”

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