Amid the volatility of climate risk, research with academic institutions may help provide better data and clearer pictures for organizations looking to understand their exposure. On this episode of the On Aon Insights podcast, host and Aon’s chief marketing officer, Reinsurance Solutions, Alexandra Lewis, is joined by Aon’s global head of Climate Risk Advisory, Liz Henderson, for a discussion on the value of collaborating with academic institutions to further our understanding of the impact of climate on how we live and work.
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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.
When it comes to the issue of climate, there’s a lot of noise. And it’s tough for organizations to find the most appropriate information and benchmarks. New companies and vendors are continually popping up, promising to provide the best climate data. Partnering with academic institutions is one way to cut through the clutter and improve our understanding of climate risk and volatility. We asked Liz Henderson, Global Head of Climate Risk Advisory at Aon, about partnering with academic institutions to further our understanding of the impact of climate on how we live and work.
Liz Henderson:
Part of our philosophy when we started down this path of identifying academics to support us was really around the idea that climate science is wide-reaching. It's a dynamic field. There's a fragmented landscape of data from government sources, from academia, from private vendors that are starting up to try to use this data for clients to make informed decisions. And when you are a user, and especially a newer user of this type of information, it is actually extremely difficult to, one, feel confident that you're getting information that is relevant to your organization, represents the kind of current state of scientific thinking, and is presented and articulated to you in a way that is most important to your business and the decisions you need to make with that information. And so our theory behind working with these academics is that we can help to support that need.
We're trying to help our clients understand, when you're doing forecasting in this active area of research, that there isn't really one right answer. That there's lots of versions of the world. And that pulling this type of insight into your decision making framework allows you, just really, fundamentally, put your hand to your heart and say, this is my view of my risk using the best science that's out there, and here's why I feel that way. Because at the end of the day, that's what we're here to help our clients be able to do.
Alexandra Lewis:
Partnering with academia creates insights in many areas of climate, weather, and risk. One example: severe storms. In the U.S., massive thunderstorm systems can go across many states and last for days. Beyond disruptions to travel and day-to-day life, these storms can also cause major damage. Hail, flash-flooding, and tornadoes make these storms very complex and costly. We’re still in the early stages of understanding how climate change is affecting these storms. Meanwhile, the losses are increasing. Recent research from academic partnerships may help us determine why, and what we can do about it. Liz explains:
Liz Henderson:
For a long time, people would've thought of severe storm as a quote "secondary peril," and now it's really more of a primary driver of loss. But the reason for that is a combination of frequency, and exposure, and inflation. And we recently did a study that found that about over the last 10-plus years, about 80% of the increase in severe storm losses was driven by exposure growth and urbanization, rather than, you know, pure climate change effects. And with that kind of information, when you're thinking about how do I manage my climate risk, that it tells you so much about what you have to do and can do to actually mitigate that loss. So it's not a hazard problem, it's an exposure problem.
Alexandra Lewis:
This research goes a long way to help improve climate models and forecasting. These kinds of models provide crucial risk insights for companies. There are, however, still constraints. Most models are effective for imagining near-future impacts of climate change. With their data on climate history and recent trends, this can be very helpful. Longer-term views, however, can be more challenging. While data can provide a long-term view at the future on a global level, they may not be able to predict frequency and severity of weather in a local area. Liz says this will change and improve. And there is still much that can be done with current data and tools.
Liz Henderson:
I think over time, the tools we have will get much better and much more refined, to predict that kind of medium and long-term planning. But in the meantime, our plans are being asked to give them a number. The Fed is asking for a hundred-year P&L from a northeast hurricane by 2050. So you have to come up with a way to answer that at the moment, that takes into account all of that uncertainty that exists. And that's exactly what we're trying to help with. You can answer these questions, the tools are not going to give you an answer out of the box. You have to have an end-to-end kind of risk program that helps you understand the data going into the different models, the methodologies that they take, the data that's coming out, and the sources of volatility that the models don't account for at all. And that's how you get a robust program.
Alexandra Lewis:
So what can companies do with knowledge gained from academic research partnerships? One action item is to reconsider the idea of risk. Studies show that when considering risk from a hurricane, for example, there are three things involved: hazard, exposure, and vulnerability. Risk, then, is understanding the full impact of a loss in those ways. Another step is to take a 360-degree view of climate risk. Research helps pinpoint all the areas of loss and risk. Elements to consider will be physical risk, but also transition risk, carbon footprints, reporting and more. Perhaps a final step is to get comfortable with uncertainty. Models will never be perfect. Data will never be fully complete. But, Liz says, we can still strategize.
Liz Henderson:
Models change every year, every two years, every five years depending on the vendor. They're taking into account new science, and they're taking into account new loss data. So all of that uncertainty, to put your hands around it, you have to start with what's my program? What is my remit? What is it realistic for me to achieve today? And how do I put the structure into place so that as science changes, as my data gets better, as the models update, that we can quickly adapt and understand that, and communicate that change to the appropriate people that it needs to be communicated to? That piece I would start with. You have to stop and start with, wait, what does the climate risk program actually need to look like to account for all of that uncertainty that's there?
Alexandra Lewis:
Let’s recap on what we’ve just learned. Amid the volatility of climate risk, research with academic institutions may help provide better data and clearer pictures. This research can pinpoint what’s happening behind the headlines, and help organizations better understand their true risks. Climate science and models will continue to improve over time. And looking at climate risk in a holistic way, and embracing uncertainty, can help companies better strategize for today and tomorrow. And just in case we think climate risk discussions are always inherently frightening, remember that many climate perils are impacted by people. Research from these partnerships reinforces this. Which means we can make changes to lessen that risk. And many changes are underway. Take, for example, the wildfires in California. Liz provides a bright spot to consider:
Liz Henderson:
In California, the amount of federal spending and state spending that's going into better forest management, prescribed burns, basically removing the congestion from our forest is going to have an impact on how large wildfires will be, and how able our suppression, once a fire starts, how successful will it actually be. So there's stuff going on that actually will start to have an impact on how devastating wildfires are, even from just that side of things. Not to mention the amount of investment that's going into community-level and building-level resilience. That will, even if there is a fire occurring, again, focusing on the investments you can make to reduce the loss outcome.
Alexandra Lewis:
Thanks for joining us at On Aon Insights. And thanks to Aon’s Liz Henderson 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.