On Aon Insights: The Role of Insurance in Climate Plans

On Aon Insights: The Role of Insurance in Climate Plans
November 28, 2023 7 mins

On Aon Insights: The Role of Insurance in Climate Plans

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In episode 4, host and chief marketing officer, Reinsurance Solutions, Alexandra Lewis, is joined by North America leader for Aon’s Climate team, Natalia Moudrak, for insights into the role of insurance in creating climate resilience.

Key Takeaways
  1. This episode explains how insurance plays a critical role in addressing the challenges of climate.
  2. In this episode, experts discuss strategies to prepare for developing technologies.
  3. Tune in for tactics to help organizations better prepare for future climate risks.

Alexandra Lewis:
Welcome to the On Aon Insights Podcast, where we explore the hot topics surrounding the issues that matter to you. Today, our world is more volatile than ever. We’re overloaded by data and compounded by complexity and uncertainty. Important decisions are often being made without the right information, the right insight and, more importantly, the right advice. This is where we come in. From traditional areas like risk and health to new challenges like technological and digital disruption, we’ll bring together Aon thought leaders and industry subject matter experts to give you the clarity and the confidence to make better decisions. This season, we’re exploring ESG – the world of Environmental, Social and Governance issues.

In 2022, natural disasters caused economic losses of over $300 billion. But less than half of these losses were actually insured. The damage was not only financial. Over 31,000 people died as a result of natural catastrophes last year. We asked Natalia Moudrak, North America Leader for Aon’s Climate team, about the role of insurance in creating resilience towards climate change.

Natalia Moudrak:
The toll from natural disasters is not just economical, it's social and environmental and insurance industry is on the forefront of this challenge and has been for decades. It has been modeling natural catastrophe risk, providing capital for disaster response, encouraging proactive action to limit losses. And on the other hand, there is the challenge of transitioning to lower carbon economy to limit the emissions and slow down the rate of global warming that is causing the increase in severity and frequency of these extreme weather events. Insurance can also play a significant role. This team at Aon, Energy Transition team, is helping clients with thinking about means to de-risk their investments into newer clean technology solutions such as green hydrogen projects, long-term energy storage solutions, sustainable aviation fuels and so on.

Alexandra Lewis:
These newer technological solutions will be an important tool for many organizations, and for their insurance cover. But, some may be so new they represent increased risk. And that may mean less bankability and risk protection. Plus, many of the technologies we’ll need to help us achieve a lower-carbon world may not exist yet. Natalia describes how organizations can prepare for technology that may still need to be developed.

Natalia Moudrak:
The International Energy Agency, the IEA, states that much of the technologies that are needed for the world to stay on track to limit global warming to 1.5 degrees by 2030 is actually known today. But beyond that, most of the estimates on how we'd stay on track to that target rely heavily on assumptions around adoption of new and emerging technologies. Oftentimes it's hard to scale financing for these first of a kind technology pilots given hesitancy to deploy capital into areas with less proven history of technology performance. I think this is why it becomes so important to think of ways where we can combine risk, engineering and finance acumen and also work collaboratively across public and private sectors to optimize risk transfer and project financing solutions. For these companies to grow and scale and to attract the financing to do so, it's so important to understand and to convey to potential investors the dollars and cents value of their IP assets. It's also important to protect that value against various risks like patent trolls and infringements. Once a company was able to, one, quantify IP asset value; two, wrap it in an insurance protection layer, then it can also be collateralized, and company may be able to access new means of growth financing, such as IP backed lending solutions.

Alexandra Lewis:
As companies seek the best ways to protect themselves and plan for the future, reducing carbon dioxide emissions has become a key focus. Decarbonizing may help reduce the pace of climate change. Plus, it can show stakeholders and investors important progress when it comes to innovation. Natalia says decarbonizing is an important tool, but must be viewed in the right way. And insurance plays a critical role.

Natalia Moudrak:
Voluntary carbon markets are rapidly expanding and they can present a huge opportunity not only to drive climate transition, but help achieve a range of environmental and social impacts. They can help improve resilience to natural disaster events, and in some parts of the world also help alleviate poverty when the revenues from carbon credit sales are shared with local communities. But there is now a growing recognition that purchasing carbon credits, while it can be a legitimate part of decarbonization strategy, it should only be done by entities when they have already pursued action to reduce emissions across scope one, two, and three and only apply towards residual emissions that simply cannot be removed or reduced through operational efficiencies alone. As insurers and reinsurers assess the risks of volunteer carbon projects and go through the underwriting process, they provide a second pair of eyes. Now having insurance in place for these projects can then help with building more confidence in voluntary carbon markets and in turn fuel greater investment. I think that actually without insurance, voluntary carbon market will not be able to scale and attract vast amount of institutional capital that needs to be there by 2030, by 2040, by 2050 to meet our net zero commitments.

Alexandra Lewis:
This is a highly complex area that can challenge the most experienced and seasoned organizations. So what can clients and prospects do today to help themselves and prepare for more change in the future? Natalia explains.

Natalia Moudrak:
I think that, first of all, it's important to recognize that climate change is real, it's happening and it's not going to go away as a function of time. To limit the negative impacts of climate change, clients need to think about what can they do today to better prepare and withstand the impacts of extreme weather events such as floods, fires, hurricanes and heat waves. This means modeling the risk to understand what it looks like today and what it may look like in the future, identifying areas where you are at most risk, figuring out how to address these vulnerabilities, which can mean spending more money on resiliency best practices to protect people and property, securing additional risk transfer capacity to supplement internal budgets and current insurance coverages, and doing that ahead of the next big disaster that may strike. Now on transition, it's about understanding the commitments that have been made to lower emissions and identifying practical actions to get there. Critical to these efforts is the cross-industry collaboration and bringing together private and public sector entities, and insurance should not be an afterthought in that equation. It should be baked into innovation conversation right from the outset.

Alexandra Lewis:
Let’s have a quick recap of what we’ve learned. Insurance plays an important role in creating resilience for climate change. New technologies may be critical for the future, but may also represent new risks. Decarbonization can be one part of an effective climate strategy. And planning now for the likelihood of natural disasters and other events will help organizations weather the storm.

Thanks for joining us at On Aon Insights. And thanks to Aon’s Natalia Moudrak for her expert take on the topic. We’ll be back soon with another episode exploring ESG and Climate. Remember to check our show notes for recommended reading and places to learn more. And don’t forget to rate, review and subscribe to the podcast. Until next time.

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The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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