Aon’s Dom Probyn – Thinking big to accelerate progress on climate change and nature

The (re)insurance industry is reeling from an unprecedented property cat renewal period and the losses suffered by the world in 2022 from weather-related events were extraordinary: economic losses from natural disasters were estimated at $313bn; three drought events were among the top 10 economic loss disasters; and global insured losses exceeded $100bn for the third year in a row.

Hurricane Ian was responsible for about 30% of economic losses and 40% of insured losses globally, however, many regions of the globe recorded significant disaster events.

Physical risk is the industry’s heartland and our experience in 2022 only reinforces how much the development of climate change as a phenomenon is inseparable from the experience of our industry and just how urgent our need is to act.

However, climate change is not just about the economic risk we face due to an evolving weather system. As the dust settles on 1/1, we must take the opportunity to step back and significantly broaden our perspective and increase our ambitions as we set goals for the year and beyond.

We must ensure we are setting the foundations for the industry to also:

• • Reduce the costs and volatility of the economic transition.

• • Unlock green growth opportunities.

• • Protect nature and biodiversity.

(Re)insurers can help solve the climate crisis by matching capital to risk where it’s needed, such as via clean tech solutions, and by de-risking projects and technology development, which will encourage faster and more meaningful investment.

However, achieving a net-zero transition is going to require up to ~$3.5trn in annual net new investment over the next 30 years. Even if the world falls short of net-zero, spending will be in the trillions, requiring insurance capacity at an unprecedented scale that goes well beyond the balance sheets of existing P&C carriers.

It is not just that this industry could grow, it is that the industry must grow if it is to play a material role. As Aon’s CEO Greg Case says: “At a time when these risks are growing, we should be getting bigger to help support these risks”.

Addressing nature

At the same time, nature is declining at rates unprecedented in human history and the rate of species’ extinction is accelerating, with grave impacts on people and communities around the world. At COP27, the Loss and Damage Fund was a key agreement which outlined the importance of ensuring the integrity of all ecosystems, including in forests, the ocean and the cryosphere, and the protection of biodiversity.

Nature and economic prosperity go hand in hand. The World Economic Forum estimates $44trn of economic value generation (over half the world’s total GDP) is moderately to highly dependent on nature, and as a result is materially exposed to the numerous risks stemming from nature loss.

Innovation and ambition

We must see our role as not to only indemnify our clients for the direct economic consequences related to weather but to enable adaptation and protection, hasten transition and transformation on a new scale and in new ways.

Today, forward-thinking insurance companies are driving the global economy by originating solutions that safeguard businesses, governments and communities. However, more work needs to be done as our role in improving resilience in the economy evolves.

The industry is moving away too quickly from carbon intensive/high emitting industries and companies rather than enabling and supporting their transition. We are not moving fast enough to support low carbon technologies that help accelerate the climate transition.

(Re)insurers need to engage and build solutions that help accelerate the climate transition and capture our single biggest opportunity; to de-risk investment into de-carbonizing the global economy.

To do this, our industry needs to industrialise forward-looking pricing models; spotlight our role in risk financing; reassess the annual policy renewal cycle; and collaborate more to build sustainable markets. We will do this through collaboration and innovation with stakeholders, including existing and alternative sources of capital, green technology startups, risk mitigation firms and the public sector, so our society can decarbonize at scale.

We will also achieve this with broader and more ambitious goals, so consider this:

• • How can data and analytics help us not only measure, quantify but alsoidentify unmet needs and opportunities for better product development and deployment, especially for new energy technology?

• • How do we truly engage with transitioning clients so that the industry is not just limiting access to risk capital but is also creating solutions that truly hasten transition?

• • How do we act with urgency as the world needs and match the longevity of thinking, strategy, and stability of risk capital that our clients need?

• • How do we continue to enhance our understanding of forward-looking climate risk and begin to apply our knowledge of climate risk in new, critical areas?

Addressing these issues will be key to accelerating the (re)insurance industry’s role in tackling climate change and nature degradation and are key priorities to consider in 2023.