On Aon Looks Ahead to COP28 with Eric Andersen

On Aon Looks Ahead to COP28 with Eric Andersen
November 30, 2023 19 mins

On Aon Looks Ahead to COP28 with Eric Andersen

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In this special edition, Aon experts discuss the opportunities for progress at the COP28 Conference and how Aon is helping clients mitigate climate risk.

Key Takeaways
  1. This episode highlights Aon’s strategy for employing technology while addressing climate.
  2. They address the key differences of today’s risks from past challenges.
  3. Aon experts discuss the motivators behind developing risk capital innovation at Aon.

Intro:
Welcome to “On Aon,” an award-winning podcast featuring conversations between colleagues on, well, Aon. This week, we hear from Eric Andersen for a discussion on this year’s COP28 conference and the risks and opportunities that climate is creating for our clients. And now, this week’s host, Bridget Gainer.

Bridget Gainer:
Hello everyone. My name is Bridget Gainer and I'm the Global Head of Policy and Public Affairs here at Aon. Today we're here to talk about COP28 Conference and how Aon is addressing climate. So, in the past, COP 28 was a conference where governments and nonprofits and advocates came together to discuss the climate crisis. How it has evolved, and this year is probably the best example of where they're really bringing the private sector in as an equal partner to have these conversations. Because we all know that if we're going to solve a problem of the size and scope of climate, we're really going to need to bring all the players to the table, including the market. And the exciting thing about it is Aon is really playing an important role here. And with me today is Eric Andersen.

So, Eric is the President of Aon. He's been here and in the insurance industry over 25 years, and he's seen all sides of the market. And that's what makes it exciting to have this conversation with him today. Whether it's the broker side, the client side, sales, he really brings a full spectrum of our industry. So, Eric, thanks so much for being here today.

Eric Andersen:
Thanks for having me here today, Bridget, and I appreciate you rounding down on the amount of time I've been in the industry. Very much appreciate that. Listen, I'm really excited about what's coming up in the next few weeks with COP. I think our opportunity to talk to governments, to talk to our clients, many of whom the large ones will be in attendance, the global insurance marketplace also there talking about the climate crisis and how each part of the attendees can play a role that's a little bit different from each other, but ultimately, as I think we've said in prior forums, the groups all need to work together to get it done. And so it's really great to have us there in the way that we are and I'm really looking forward to being with that group.

Bridget Gainer:
Well, I am too. So let's just jump right in and talk about how Aon is going to play this role on how the industry will do it too. So first let's set the scene. If you look at the risks, but also the opportunities for climate, how does that affect our clients? What are the risks and opportunities that they're facing every day?

Eric Andersen:
You could break it down into two major areas, right? First of all, there's the physical risk, which is pretty apparent to everybody. It's the effects of a changing climate, whether it's wildfires or stronger hurricanes, flooding, things that are out of the ordinary that have become very apparent globally over the last couple of years. And so, people are having to deal with that, right? And I think in our industry, that tends to show up in the form of property insurance. And so you see a lot of dramatic changes in the marketplace as the insurers and the clients are trying to deal with how they actually manage their property risk in a changing climate, how it affects their business decisions about where to put a new manufacturing facility, where to put hotels, all the kind of things depending on what industry you're in and its immediate effect.

The second is the transition risk, which is obviously the bigger issue. And we'll be discussed a lot at the COP conference. And by industry, it's different. How the automakers are dealing with it in terms of EV, how the airlines are trying to deal with it, how food and agriculture are trying to deal with it. And so, our opportunities across that whole spectrum are really significant because we can help each client in their industry think through how to manage the effects, the effects of a changing climate, but also how they actually invest for the future in the transition. And so, whether it's new technology, whether it's different locations for facilities, whether it's a changing manufacturing process, there's really a lot there for us to help them with.

Bridget Gainer:
I think this is actually one of the most exciting things for Aon because we have products and services like property, as you mentioned. We've sold property, it's probably the most common product that is in our industry, except it's being used in completely new ways now. And so not only are we developing totally new products that have yet to ever see the market, obviously we've seen the development of Parametrics and ILS and other things to meet needs. But even something like property, it's going to be now innovated in order to meet the transition of clients across the economy. So that's I think part of the exciting role that we get to play. Obviously, none of that happens without needing the capital part. And how do we bring those guys to bear.

Eric Andersen:
Bridget, it's one of the reasons why we launched this Risk Capital innovation within our own firm, where you're bringing the skillsets that have largely sat in the reinsurance part of our industry, whether it's modeling, whether it's different structures to engage not just insurance capital, but capital markets. And you see those start to move over into the commercial space, whether it's analytics around climates for banks or analytics for construction firms as they make bids on projects in climate affected areas. So, the innovation that's happening within our own industry I think is pretty significant and is really going to put our clients in a better position.

Bridget Gainer:
I think climate is reverberating through Aon in really exciting ways. Another way that we think about the innovation and the development is how we're bringing technology to bear. You've got innovation, you've got capital, and technology is kind of the third leg of that tool. How are we employing technology as we think about addressing climate?

Eric Andersen:
So, I think that the technology is really around the analytics, right? And how we invest in that capability because ultimately, and you said it a minute ago, how you match risk and capital starts with understanding of the risk. And so, you mentioned our climate team and their ability to take what has essentially been decades of physical risk and how it has moved over time. Try and put predictive analytics on it because the changing climate means that the historical models are not as predictable as they used to be. So how do you actually use technology to do that? Then I think most importantly is how do you take the insight and get it into our client's hands in a way that they make better decisions? So, I referred to the bank before, and I'll just to go a little bit deeper on it. So, they have a loan portfolio that is affected by climate change.

They want to understand how much and ultimately when they understand how much they're going to want to manage that risk in some way, or that construction firm I mentioned where they're bidding on projects in areas that are subject to extensive heat where people are not allowed to work outside, how does that affect the price of their bid? How do they use that insight? So, the information is there, it's been there, it's just how do we take it and mold it in a way that the clients can digest it in a different way as they try and figure out how to manage through the climate transition inside their own particular business.

Bridget Gainer:
And that's a great point, which is to say, again, people have made mortgage lending since the dawn of time construction firms have been building, but what's different now, because we are definitely seeing more pressure as they try to make those decisions and investments. How do you see the market, in your, as we said before, extremely long tenure with us? How have you seen that develop over time and what does feel different now?

Eric Andersen:
Well, listen, I think first off, the risks are more interconnected and complicated than they have been in the past. So, I think that's an easy one. And I think everybody sees that and understands that what's happening in climate, what's happening in transition is what happens in supply chains and they're all sort of linked together. And I mentioned that the weather patterns are different. So how do you use technology to apply it to that kind of a scenario? And I think it takes us back to the COP meeting, which is each of the participants in that session, governments, private sector, really are going to require a collaboration that historically hasn't been natural. Everybody has different constituents and different ways of doing business. Getting that together in a way that moves everything forward, I think is one of the critical components. And I would say from an insurance capital standpoint. And listen, we spend a lot of time talking with our insurance partners about the effects of climate change, how they support the transition.

And I think their hearts are in the right place, I really do. And I think they're trying hard. There is a natural pull if you would, to them that says, I need to protect and understand the risk I'm taking. And this is an era where the historical risk assessments don't work as well for future, at least as we sit here today as we try and develop the new technologies. So, the natural instinct is to just move away. If each insurer solved for themselves, they would just move three miles in from the coast to get out of wildfire areas or areas where there's strong convective storms and they would just reduce risk. But I think, and our job, frankly, is to keep them in the game and make sure that they're there with the clients offering the capital and products that they need as they go through the transition and make those decisions around their business. And they're trying, right? And so, I think that's one of the reasons why so many of them will be at this COP conference because they're trying to learn and understand what role they can play with us in helping our clients.

Bridget Gainer:
And that is, I think one of the reasons why our role at this moment in time and climate is so interesting because it's really a bridge between all of those silos that you mentioned. You obviously have the underwriting community that has provided the ability for people to invest in industry for hundreds of years. They're confronting new things, clients are confronting new risks. The other interesting partner in here is the government and the public sector. For many years, the government and public sector kind of what we call self-insured, which they didn't really insure, but they were in many ways, the insurer of last resort even. They cannot continue to be alone in the preservation and recovery business. And so, I think that if you think about the connective tissue that the industry provides, that's an opportunity for us to bring that innovation, to bring the capital, because you can challenge people to stay in the game, but you do need to meet the pathway. And I think that's what you mean when we talk about the role, we're playing on better decisions is how do we meet people halfway, whether it's capital, whether it's clients, or even whether it's the government.

Eric Andersen:
Well, listen, I think the government plays a critical role in this in a couple of ways. But just from a budgetary standpoint, many of their budgets are pinched. And so how they deal with the effects of a changing climate, can we help them create pre-disaster financing where these governments are able to use insurance techniques, whether it's catastrophe bonds or ILS or parametrics, and essentially set up pre-funding in the event of a weather event that affects their power grid or what have you. And so, I think it also helps economic activity because if investors know that the governments are actually able to repair and replace things that are damaged with severe weather, they're willing to put the investment down in the country, whether it's an island, whether it's power materials or what have you. And so, we've had a great partnership that's been really building with the International Federation of Red Cross around just that. And so, there's been some great innovation in the marketplace that does pre-disaster financing that allows them the access to funds when the event happens, to be able to immediately meet the needs of people that are struggling with a change in climate.

Bridget Gainer:
Tell me a little bit more about that because I think this is one of the most exciting things that's happened around Aon in the last couple of years. So interestingly, Aon's had a partnership with the Red Cross for decades because we step into disaster just like they do. And we've had this partnership in the US, around the world, and we come in after natural disasters. Your point about pre-funding, maybe talk a little bit about that because the Red Cross also has limited resources, and so maybe tell a little bit about how we structured this deal and the effect it might have.

Eric Andersen:
Sure. Listen, the International Red Cross is an overlay above all the individual country Red Crosses that are out there. And so essentially, each of them raise their own funds and try and deal with their own state or country catastrophes. When something happens beyond their budget, they go to the International Red Cross for additional support. But as you can imagine, budgets are tight. And so their ability to meet the needs of all the various country requests is been exceeded in the last few years. And so we've been working with them on essentially creating a buffer and then additional funding from the insurance market that in the event that there are a series of events that happen in a calendar year that exceed their budget based on historical amounts, the insurance industry actually funds for the International Red Cross funding that they can then disperse to locations where there's an immediate need.

Historically, without that program, the Red Cross would have to go out to donors once an event happened to try and raise funds, which was always challenging at a time of great immediate need, which is really where they do their best work. This gives them the funding to be able to actually meet that need beyond what they could do today. So, it's really an exciting innovation. Very different from CAT bonds for countries or things like that. This is an aggregation of activity as opposed to just a weather event.

Bridget Gainer:
Well, look, I mean, as a colleague who's been at Aon for almost 23 years now, when I see examples like that, I mean, look, remember we did the World Bank CAT Bond for earthquakes, and we've done economic development and hurricane bonds for Jamaica. We've looked at not just the Red Cross, but then what we're doing in Puerto Rico now to protect the economy. It makes you very proud of the colleague to think we're bringing all of that great thinking and market presence there for commercial clients, but also for people around the world, many of whom would've never had access to insurance. So how do we spread the knowledge, the innovation and the capital that we have access to create resilience and to grow resilience for that population? So, it's an exciting manifestation. And I think when we talk about COP, that is an incubator for ideas like that. Eric, you and I'll both be at COP with others and other colleagues, and we will be meeting not just the Red Cross, but people who are trying to do crop insurance in Africa or people who are trying to expand the mitigation and infrastructure investments.

So when Aon goes to events like this, what it does is we come back with new ideas, we met new people when we built our network, and we've also been able to, in the fact that we're bridging the gap between where people are and where they need to be, we're shrinking that bridge and we're shrinking that space in between. And that is a really exciting part. Getting back to the clients, how else can we really think about how we're helping clients in transition? What's the ways that we serve them beyond just a policy or beyond just capital?

Eric Andersen:
Listen, I think there's a couple of ways. First, we first have to start with the resilience aspect and protect against the physical risk change. I think that is primarily a lot of what we're doing right now. But we're also working on how we reduce the cost and volatility of the transition itself, right? Because I do think our ability to bring data and insight around better decisions for individual clients is a sort of major thing. And then ultimately, how we bring capital and structure should hopefully unlock new growth opportunities for people all over the world. You mentioned the resilience thing and the crop insurance and the whole COP conference, and it's one of the best parts I think of Aon as Aon is that often the changing climate affects those who are least prepared to deal with it.

And so our opportunity to bring ideas around resilience and bring ideas around capital allocation to help the transition means we actually affect the underserved in a pretty significant way if we get it right, which is why I think we're putting so much resource towards this kind of a conference as well as just the overall topic because it is uniquely our opportunity, I think, to make that change and engage with that group. And I think we're pretty excited to do it.

Bridget Gainer:
So, Eric, this is the first year that we've really had a delegation go to COP. And if we think about it, we're all excited about who we're going to meet and the conversations that will ensue, what's success look like? If we have a really successful COP, how does it matter for Aon?

Eric Andersen:
It's a great question, and it's something that we ask ourselves as we plan for the events that we're going to do and the presence we're having there. And listen, I would just say my experience with Aon, and I think yours too, we're an action-oriented company, and we will go anywhere where we think we can learn and affect and accelerate our agenda in helping our clients. So, I think that's first, and there is a lot that's going to happen there. And so, we want to be there. We want to hear the new ideas; we want to hear about the new innovations that are underway. Actually, we want to have a voice in the conversation so that we can help set global strategy on what the transition looks like and also learn how other people are thinking about it.

And I think also for me, I think we need to build confidence in our industry and the role that we can play in dealing with the resilience issues of today, but also how we play a significant role in the transition that is underway. So, if we can do all that, I think it'll be a great use of our time and resources.

Bridget Gainer:
Look, I'd love to come back in six months and think, what is different? What have we done? What's new? And I think that that will be an interesting challenge for ourselves as we go.

Eric Andersen:
I agree.

Bridget Gainer:
So, when you think about all the innovation that is happening around the firm, it's really exciting. You think you can't go throughout your day without touching something that we can help meet the climate challenges. So, it's exciting for all of us. So, I think that's it. I want to thank you, Eric, for coming on with us today. I don't know if you have any other final comments or thoughts for the colleagues and those listening. But to me, Aon is meeting this challenge and it's been a really exciting thing to watch, to be a part of.

Eric Andersen:
Look, maybe the last thing for me, Bridget, would be to all of our colleagues that are listening, be proud of the company. It's really trying to make an impact, and it's completely leaning into this issue and really trying to do good in the world with all of our capabilities. So, you should be proud of that. I know I am. But thanks for having me. It's always a pleasure to be with you, and thanks again.

Bridget Gainer:
So that's our show for today. Thank you all for listening, and look for the next episode of On Aon coming soon.

Outro:
This has been a conversation “On Aon” and this year’s COP28 conference. Thank you for listening. If you enjoyed this latest episode, tune in soon for our next edition. You can also check out past episodes on Simplecast. To learn more about Aon, its colleagues, solutions and news, check out our show notes, and visit our website at Aon.com.

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