Climate Analytics Unlock Capital to Protect People and Property

As climate change increases the frequency and severity of natural disasters and extreme weather, there are significant economic and social impacts. Enhanced data and analytics, climate modeling and industry collaboration are some of the ways organizations are protecting their employees, closing the protection gap and accelerating solutions to achieve net zero.

Weather Trends: Today and Tomorrow

Weather and climate underpin many of the top risks businesses face today. According to Aon’s 2023 Global Risk Management Survey, four of the top 10 global risks — business interruption, regulatory and legislative changes, supply chain and distribution failure, and damage to brand or reputation — are all impacted by weather.

Changing climate conditions are demanding organizations address evolving risks and prepare for the journey to net zero in some of the following ways:

1. Assessing medium- to long-term event impacts: Climate modeling can inform how conditions such as drought, extreme rainfall, extreme heat, freeze and wildfires may change in the future — using today’s exposure to climate as a benchmark. But it’s also critical to assess where and how changes in chronic risk may translate to more frequent or severe acute risk. For example, climate change is increasing the intensity of extreme rainfall events, which increases flash flood risk, potentially causing property damage and loss of life.
2. Industry collaboration: Given the scale of climate change, the private and public sectors are coming together to close the protection gap and unlock capital to accelerate the development of green technologies.
3. Responding to shareholders and regulators: Companies are increasingly aware of — and responsive to — their climate obligations to regulators and shareholders when it comes to both compliance and communication.
4. Addressing the workforce: Weather and climate’s impact on workforce can be significant. Workforce health and safety is a primary concern for employers, as natural disasters caused significant fatalities in 2023, driven by earthquakes and heatwaves.

An Outlook on Climate Modeling

Natural catastrophe and climate modeling are helping organizations understand and assess their most significant exposures. They also support efforts to mitigate the impact of climate risk through alternative risk transfer solutions, such as parametric insurance, which are available in areas where traditional risk transfer solutions may not be available.

Robust climate modeling must consider a company's unique footprint, down to the asset level, and have global coverage.

“We have truly global data sets around a number of chronic risks — things like freeze risk, extreme precipitation, extreme heat and drought — and can provide a view of how these hazards will evolve over time,” explains Liz Henderson, Global Head of Climate Risk Advisory. “It is not a catastrophe or a full loss model, but it does give you an initial view regarding potential changes in climate risk.”

Chronic perils are driven by slowly evolving changes in temperature and rainfall patterns such as heatwaves, drought and rising sea levels. The physical risk and impacts accumulate over a long period of time and are the result of sustained or frequent exposure to increased hazard.

Acute perils, on the other hand, are infrequent, short-acting events like severe convective storms, hurricanes and floods — perils traditionally analyzed and covered by the insurance industry. While these can often be more extreme, they are also less common, leading to the development of catastrophe models to provide a way of measuring and managing their impacts.

Risk from chronic perils in the future can be projected using standard climate modeling approaches, while changes in acute perils are more challenging to project.

Some modeling firms are combining both approaches by incorporating the impacts of climate into their catastrophe models. For example, Aon’s Impact Forecasting team takes this approach for their U.S. hurricane and Germany flood models to enable longer-term planning around risk management, underwriting and regulatory reporting.

Another challenge when it comes to changing weather is time horizons. Unless organizations have assets that are built to last for the next 50 years, it can be hard to convey the relevance of changes in future extreme weather events.

But we do know that where there are changes in chronic risk, there are going to be changes in acute risks as well. And our confidence in the relationship between chronic and acute perils is increasing, driven by collaborations with academia to advance the science and understand the impacts.

We can use these climate insights to help understand where mitigation may be necessary so increases in hazard do not lead to increases in risk. Models may project more severity in storms, for example. But existing and planned mitigation — either in the natural or built environment — can reduce the impacts. A robust understanding of vulnerability alongside hazard is necessary for a holistic view of risk.

The long-term unpredictability of weather and climate can also impact specific sectors, such as renewable energy and infrastructure. Renewable energy projects, like offshore wind farms, need specialist technology to respond to changing climate conditions. As Guido Benz, CEO of Aon’s Global Renewable Energy Practice, explains: “There is a category called hurricane class wind turbines, and they're being certified based on models, but we have not actually seen them withstand the tests. These are elements that come into play in the context of extreme weather in the future.” It is apparent that there is unpredictability in new risks alongside the science and rigor of models.

Outlook on Industry Collaboration

Insurance has an important role to play in closing the protection gap and encouraging more green technology and innovation — which will ultimately accelerate the journey to net zero. But as (re)insurance premiums rise and carriers limit coverage for regions deemed too high-risk, there will be an increased emphasis on public-private partnerships.

In a number of countries, local and national (re)insurance schemes are filling gaps in coverage in high-risk areas; but questions about their solvency and sustainability have been raised in certain quarters. The issue illustrates one of the challenges of public-private partnerships: the financial burden that can befall state and local governments and the urgency needed to address climate-exposed risks.

Weather and climate risk will likely increase premiums, encourage more public intervention and ultimately influence where people choose to live and where businesses build new projects. These dynamics will inevitably demand greater public-private partnership to address risk coverage, financing and intellectual property sharing to limit exposures and build climate resilience.

Outlook on Climate Regulations and Investor Perceptions

The global regulatory landscape for climate risk is complex, particularly for multinational companies. Due to macroeconomic circumstances and looming mandatory disclosures, including the Corporate Sustainability Reporting Directive and SEC Climate Disclosure ruling, companies are focused on compliance.

“This is a bit of a balancing act for companies in the U.S., where climate and ESG are political terms, but they have large stakeholders in other regions where enhanced reporting, transparency and action on climate is expected,” explains Laura Wanlass, Global ESG Advisory Leader.

Multinationals need to strike a balance between disclosure and the desire not to raise undue controversy — whether it be accusations of greenwashing or questions from anti-ESG activists who remain vocal in the U.S.

As part of the transition to a net-zero economy, investors recognize their role in moving the needle toward decarbonization. By providing capital to emerging technologies and greener operating models, they can support the transition process, while also accessing potentially attractive future returns.

Top Climate Regulations to Follow

Outlook on Weather’s Impact on the Workforce

Weather and climate are playing an increasingly significant role in workforce strategy, with employers considering factors including:

• The wellbeing and protection of their workforce
• Where to open a new facility, factory or office
• Applicable climate regulations and investor sentiment
• Creating a mission-driven culture that attracts and retains talent
• Reskilling and upskilling their workforce to meet the demands of green technology, renewable projects and other developments

One of the more pressing considerations is how weather can impact business continuity. Flooding, hurricanes, tornadoes and wildfires can impact a company’s employees, which can then exacerbate impacts on underlying business operations. Mitigation efforts include calculating the number of employees at a given location when doing physical risk modeling and looking for creative risk mitigation strategies — for example, issuing employee resiliency bonds to help employees with costs associated with extreme weather events.

With more employees working in hybrid or remote settings, employers should ensure they have data on where employees are living and when they are commuting. This information can then be paired with physical risk modeling to provide a more complete picture of the true impact of a weather event on the workforce.

How Businesses Can Prepare for Change

There are three opportunities businesses need to consider in order to adapt to and mitigate the impact of changing weather and climate.

Opportunity 1

Use Data and Analytics to Make Better Risk Decisions

Natural catastrophe and climate analytics can help companies shape decision making around the issue of weather and climate risk, enabling them to develop strategies to close the protection gap, support employers in understanding regulatory changes and unlock new sources of risk capital. Using tools to capitalize on bringing together (re)insurance and commercial risk data will be key. Doing so will help clients examine their property portfolios in detail to determine which risks should be retained or transferred, identify exposures driven by natural catastrophes and other perils and drive down the cost of risk by optimizing the value of insurance in their programs.

Parametric coverages, catastrophe bonds and international emissions trading are also useful solutions underpinned by climate analytics that are helping companies understand future weather impacts and their organization’s unique risk profile.

Opportunity 2

Use Climate Models Alongside Mitigation Strategies

Ensuring a better understanding of climate projections linked to local hazard risk and biodiversity are some of the ways companies are looking to mitigate climate exposures. To approach mitigation efforts more holistically, organizations should consider how both a transition to net zero and changes in local biodiversity can impact their business and supply chains. Taking a data-driven approach to achieve this can help clients understand a broad spectrum of risks linked to climate and biodiversity including temperature, water, land, pressures on flora and fauna, indigenous populations, socioeconomic factors, hazards and future climate risks.

Opportunity 3

Develop Workforce Strategies that Address Chronic and Acute Risks

As chronic perils become more deadly — most notably extreme heatwaves — employers know they must respond proactively to protect employees’ health and safety. Heatwaves, in particular, are associated with a rise in mental health concerns. One 2022 study² found that emergency room visits for mental illnesses were much higher during the hottest days of summer compared to the coolest days in the same season.

Organizations need to develop strategies to ensure employees and their families have access to health and benefit coverage that protects them from climate-related impacts and illnesses. Heat-related offerings range from financing for heating and cooling systems to the energy costs themselves.

Heatwave-related illnesses can also be acute, so the availability of immediate medical care is also critical. Organizations should establish a monitoring program for the early identification of signs of heat-related illness and, through data and analytics, identify vulnerable employees based on factors like pre-existing conditions and location. They can then take proactive measures to ensure their people are protected.

The impact of climate change will require a new approach to risk management; one that considers a broad range of exposures and potential outcomes. To tackle the issue and create a true net-zero economy, an estimated $150 trillion is needed over the next 30 years, and insurance has a significant role to play. The industry will help to create greater certainty around exposure management, unlock investment in green technologies through risk transfer solutions and help businesses build greater resilience in the face of rising weather and climate-related threats. While volatility and complexity will be a feature of climate risk in the coming years, data-led decision-making will be central to building a resilient business and workforce as climate losses and impacts deepen.

Aon's Capabilities:

¹ Aon’s 2024 Climate and Catastrophe Insight report
² Association Between Ambient Heat and Risk of Emergency Department Visits for Mental Health Among US Adults, 2010 to 2019 | Psychiatry and Behavioral Health | JAMA Psychiatry | JAMA Network