Aon’s Richard Fawcett – UK Industry Leader for Food, Agribusiness & Beverage, and Dominic Probyn – Director for Aon’s Climate Risk Advisory share the key conclusions from their recent webinar, held in conjunction with the Food and Drink Federation, including what the implications for enhanced climate risk are for the sector and how the insurance industry is innovating to help businesses understand, analyse and transfer the risk to protect their balance sheet and brand.
Climate change is introducing and aggravating a range of risks for the food and drink industry. Similarly, the insurance industry is seeing an increased volatility of severe weather events, with the projected impacts of climate change becoming clearer, and a growing pressure to decarbonise insurance portfolios. But, despite these pressures, the insurance industry not only continues to support the food and drink sector but is actively leaning in to help address the biggest risk challenges food and drink businesses face. Actions include deploying solutions targeting risks such as business interruption, supply chain resilience and helping organisations make longer-term decisions on investment and business strategy while supporting the climate transition, using advice underpinned by the latest climate and catastrophe analytics.
Planet Closes in on 1.5°C Warming
On the big picture of what is happening from a climate perspective, 2023 was the hottest year for at least 173 years with global temperatures rising to almost 1.5°C above average pre-industrial temperatures. Whilst this does not constitute exceeding the Intergovernmental Panel on Climate Change’s 1.5°C ceiling that is trying to be avoided, it’s clear that we are rapidly approaching this threshold. Above this threshold is where we expected to see significant increases in extreme weather losses specifically due to climate change, such as severe convective storms, flooding, drought and tropical cyclones, and leading to record human and economic costs.
Implications for the Food and Drink Industry
What then does this mean for the food and drink sector? The industry is facing significant pressure to decarbonise, reduce emissions and support more sustainable practices to protect itself and the wider environment from the impacts of climate change, whilst also expanding the adoption of nature-positive food production. This dual challenge, however, is not an easy one to navigate in the face of growing regulatory pressures, insufficient supply chain transparency, evolving consumer preferences toward products to be produced using regenerative practices, and climate risk itself which is increasing the risk to food supplies.
Reimagining the Role of Agriculture
It's interesting to consider what role regenerative agriculture will play as part of meeting that challenge. Regenerative agriculture can play a genuine role in limiting global warming, but also makes good business sense. A study of 20 US farms, for example, found that those using regenerative systems saw their profitability increase by 78 percent. While not every business in the food and drink sector is involved in farming or growing, these outcomes are still very important given they lead to more marketable products, greater resilience in the supply chain and a reduction in Scope 3 emissions. Insurance can incentivise nature positive farming by protecting growers who adopt new practices – examples of this novel use of insurance exist in the UK and the global south.
How the Insurance Industry Can Help
What else should the food and drink businesses expect from the insurance industry to help them meet the climate transition challenge? Firstly, the insurance industry has the ability to deliver a wealth of climate insight, so that the food and drink sector can understand the impact of climate change on them. These insights can come in the form of climate analytics that use the latest climate models and science to assess hazards related to climate impacted perils in different future scenarios, usually on a global basis and looking into the future for one to two decades, or climate conditioned catastrophe models which are more detailed and include vulnerability and financial modules to quantify risk and support insurance placement. The insurance industry continues to invest deeply in analytics in a dynamic and constantly evolving way in areas like climate models to understand the best fit for clients.
The insurance industry can help with the ‘so what’? Scenario analysis, risk quantification, and providing insight to support decision-making underpins a strong approach to meeting disclosure requirements. Our advice can also embed findings in the commercial context of the food and drink industry, ensuring we deliver practical value beyond compliance with reporting standards. The insurance industry can translate academic science on how climate change will affect the hazard to what it means to the risk.
Buying Protection: from the Traditional to the New and Different
Insurance is protecting ‘business as usual’ as well as providing solutions to address new challenges in the supply chain, incentivising areas such as regenerative agriculture, and covering business interruption associated with elevated climate risk. Climate events do not just create conventional insurance loss but also have a knock-on impact on the food and drink business when it comes to operating, delivering to customers and operating shops. Traditional insurance doesn’t necessarily respond to these risks, so using solutions like parametric insurance can cover these ‘non-damage’ business interruption risks - these solutions pay out claims quickly when a certain threshold (or trigger) is met, such as a certain temperature being reached, thus responding to a range of different loss types.
Working Hard to Support the Food and Drink Sector
While climate risk presents a significant challenge to the food and drink sector, with all firms impacted, particularly those with supply chains in the global south, the insurance industry is working hard to support businesses with both traditional insurance solutions and by innovating to help manage new and emerging needs to mitigate climate risk and to exploit the opportunities that will come as the world transitions to net zero.
Watch the Aon/Food and Drink Federation Climate Risk and Opportunity webinar here.
To find out more about any of the themes explored, contact Aon’s [email protected] or [email protected]
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