Aon: Green investment only way to dampen increasing risks

Aon’s new report on risks highlights climate and natural catastrophe areas to which the industry isn’t giving enough attention or money.

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Additional investment is needed to offset the high cost of catastrophe events, said Aon's newest risks report.

The insurance industry can play a pivotal role in unlocking and speeding up the flow of capital into green investments and volatility management through innovative risk transfer programmes.

This sentiment comes from Aon’s new Climate and Catastrophe report, released on Wednesday, which highlighted some of the major climate and natural catastrophe risks facing the planet, the global economy, and the insurance industry in 2024.

In the report, Aon said there were three main ways to address climate risks and the threat they pose to the insurance industry.

The first was the need for predictive analytics to ‘unlock’ the capability to price future risk. The second was more collaboration to develop effective solutions, while, thirdly, it was that “innovation is key to accelerating the path to net-zero”.

“To tackle climate risk and bring about a true net-zero economy, an estimated $150 trillion in capital will need to be deployed over the next 30 years,” said Aon’s CEO, Greg Case, in the report. “We’ve observed that capital is hesitant to go where it is not protected or where returns are less certain.”

Case also highlighted the slow speed of industry moves against climate change. “Out of the 66 natural catastrophes that caused a billion dollars or more in damages in 2023, 63 of them were caused by weather,” he said in his foreword. “Yet only 40% of weather and climate related losses were covered by insurance in 2023.”

Global natural disasters in 2023 resulted in above-average economic losses totalling $380 billion, driven by significant earthquakes and relentless severe convective storm activity in the United States and Europe. Economic losses were also above average due to non-US or European earthquakes, such as the tragedy in Turkey/Syria in February 2023.

“Severe convective storm events contributed a large portion of the
financial toll with $58 billion in insured losses."

Losses surpassed $300 billion for the eighth time in a row and were 22% higher than the long-term average.

Globally, insurers covered $118 billion, which was above the twenty-first century average of $90 billion, as well as the decadal mean of $110 billion.

In the US alone, economic losses from natural disasters hit $114 billion, with insurance covering 70% of this number. “Severe convective storm events contributed a large portion of the financial toll with $58 billion in insured losses,” Aon said. This toll included the Lahaina Wildfire in Hawaii, which was the deadliest US wildfire in over a century with insured losses of $3.5 billion. 

What are the risks and solutions?

In the report, Aon noted that the global protection gap stood at 69% and that there were 398 significant disaster events in 2023 – a number down slightly from 427 in 2022, and the lowest since 2013 – with New Zealand, Italy, Greece, Slovenia, and Croatia all recording their costliest weather-related insurance events in history.

Aon specified that better investment decision-making was needed in a changing climate to combat these escalating risks. “For investors, climate change means navigating uncertainties and understanding a wide range of potential outcomes,” it said.

“With efforts to limit global warming and its effects around the world gaining momentum, the role of investors as part of decarbonisation efforts is evolving,” the report continued.

“Investors should consider climate change
from three perspectives."

It added that decarbonisation efforts meant that investors needed to be more savvy than ever about where their money was going and if it was having the right effect.

“Investors should consider climate change from three perspectives: protecting their portfolios against financial risks, benefiting from growth opportunities in climate solutions and determining how to have a positive impact on decarbonising the real economy,” the report said.

It listed five action points to do, which included 1) integrating climate information in the investment process, 2) using and understanding the limitations of climate scenarios, 3) using investment managers with the skills to integrate climate risk into investment decisions, 4) prioritising decarbonising the ‘real economy’, and 5) investing in carbon-intensive businesses.

The World Economic Forum and Allianz have also released risk reports in January.