Speaking at the Bermuda Risk Summit, Aon president Eric Andersen has called on the insurance industry to play a bigger role in supporting companies transitioning towards net zero, while stressing that the Bermuda market could be a climate risk leader.
In a keynote address in Bermuda today, Andersen noted that pressure to transition to more climate-friendly business practices is growing from governments, regulators and shareholders.
“We want to play an active role in helping our clients make the transition,” Andersen said.
“There is a role for our industry, because you ultimately want an orderly transition. If you end up in a scenario where we withdraw from that marketplace, the risks don’t go away. You just ended up in a disorderly transition.”
“Getting our industry to play a more active role in the transition itself is where our industry can do the best good”
Aon president Eric Andersen
He said this could involve supporting clients that are in brown industries as they invest to go green in ways such as providing capital for new technologies and working with them on risk management techniques.
“Getting our industry to play a more active role in the transition itself is where our industry can do the best good,” he said.
Andersen noted climate activists increasingly targeting protesting businesses that are not viewed as climate friendly.
“I do understand that group,” he said.
“But I just think our ability to support the transition will end up being more productive. Because ultimately if we all collectively walk away today, the risk would be the same.”
Andersen said carbon intensive businesses need support to transition, rather than being abandoned.
“In order to decarbonize we need massive investments in new technology and new resources, both public and private,” he said.
“That capital will require protection so walking away from carbon intensive businesses in the short term, with no plan to transition, will leave a power generation void, particularly in developing countries. It will also strand that workforce and leave them without family-sustaining wages.”
Andersen said that none of the private, public and social sectors can get to net zero without the help of the others. He identified a need to collectively create the conditions that leverage the talent and creativity of the best scientists, engineers, technologists and inventors and which provide the opportunity to create a financial return.
“This combination will require a market to measure, price and transfer risk,” Andersen said.
“We don’t intend to just support that, we intend to help create it. We’ve done this before, and we’re looking to try and do it again with all of your help.”
He pointed to the mortgage market after the financial crisis as an example. He said data, analytics, new models and strong capital helped stabilize Fannie Mae and Freddie Mac, “and with that the US housing market”.
“That work was done by many of the players in this room today, he said. “In 2010, the US economy was overexposed to mortgage risk, just like the economy today is overexposed to climate risk.”
Bermuda played a major role in providing innovative reinsurance solutions to the government sponsored entities.
Andersen urged the industry to develop solutions to help manage the risk through the creation of new markets. He said the industry can build the data and analytics that will attract capital.
”Investors, regulators and customers are demanding that our clients show how they plan to transition away from carbon heavy business practices. Physical risks associated with climate change are well measured. Transition risks are not”
Aon president Eric Andersen
He said there is a need to measure risk and have better transparency around pricing risk.
“But, most important, we need to develop a transition risk strategy,” Andersen said. “Investors, regulators and customers are demanding that our clients show how they plan to transition away from carbon heavy business practices. Physical risks associated with climate change are well measured. Transition risks are not.”
He said that regulation, investment and consumer behaviour will be driven by how climate change affects businesses’ ability to operate and manage reputational risk, litigation and contingent liabilities associated with extreme weather and carbon emissions.
Aon working on “first employee resilience bond”
Andersen also said it is critical to ensure that innovation protects the most vulnerable. He noted that only 10 percent of the property in the developing world is insured. This creates a cycle of disaster and aid rather than reliable and timely post-disaster support, he said.
The executive provided two examples of innovation in this area.
The first was Aon last year working with the World Bank to price a catastrophe bond that will provide the Government of Jamaica with financial protection of up to US$185mn against losses from named storms.
The second example was Andersen stating “we’re currently pioneering with a couple of you in the room on the first employee resilience bond”.
He said this involves helping a large employer in a developing climate-related area to procure bonds that provide cash assistance directly to employees in the event of a disaster to help recovery.
Bermuda can be leading climate player
Andersen also commented that he believes the Bermuda marketplace has a large role to play in climate.
“Climate is massive and it fits the Bermuda framework,” he said. “I don’t think you need to create a new framework for Bermuda to be a leading player in climate.”
As this publication has previously reported, Bermuda has been working to promote the role it can play as a climate risk finance hub.
But Andersen said the market must provide the kind of insight that allows people to put their capital at risk in a way that they think they are going to get a return.
“I do think the investments people are making today around insight into those big topics actually then will draw all the capital to create this climate marketplace in Bermuda,” Andersen said.
“You are extremely well situated to lead it. You’ve got the framework of talent, you’ve got the creativity, you’ve got the history but I think without the insight they won’t come.”