The Next Chapter of Climate Resilience

Intro
Hello and welcome to On Aon and this week’s Global insight. 

Climate risk is now a boardroom issue—shaping insurability, access to capital and long-term growth. In this episode, Aon’s Joe Peiser and Liz Henderson explore how businesses can turn climate data into practical, measurable resilience and protect value in an increasingly volatile world.

Joe Peiser (00:00)
Hello, I'm Joe Peiser. I'm Aon CEO of Risk Capital, and this is the latest episode of the On Aon podcast. 

This week, we've been really busy preparing for this year's New York Climate Week. Over the years, I've noticed how conversations among businesses have shifted from disclosure, reporting and understanding exposure toward how climate volatility affects growth plans, how it affects capital allocation and financing decisions, and ultimately the ability to remain insurable. 

At the same time, we're also seeing insurers, investors, and lenders looking for far more evidence that organizations understand their physical risks and are managing them. Climate resilience is increasingly becoming a business and capital issue, not simply an environmental one. And all of this is because it's done in the backdrop of two things. One — increasing loss severity. Right? We're seeing this across the board. We're seeing unpredictable weather patterns.

In the UK, we're seeing weather that's more like Spain this summer than the UK. And that's not an isolated instance. We're seeing a lot of unpredictability. We continue to see the accumulation of insurable values in catastrophe-prone areas. 

And the other backdrop is that companies, whether they're public companies, or owned by private equity are being held to greater and greater financial rigor. 

Surprises are unwelcome, especially surprises that can be insurable. 

So, climate resilience is increasingly becoming a business issue. And I'm really pleased to say I'm not going to be alone today in examining this issue. With me to discuss this important topic of how organizations can improve their resilience and adaptability is Liz Henderson, Aon's Global Head of Climate Risk Advisory.

Liz, welcome.

Liz Henderson (01:57)
Thanks, Joe. It's great to be here.

Joe Peiser (01:59)
So I mentioned in my opening, Liz, that the conversations have been changing when it comes to resilience and adaptability. When you're talking to clients, insurance markets, and investors, what have you heard?

Liz Henderson (02:15)
I think you laid it out quite nicely, Joe, at the opening. Companies and organizations are really nervous about that unwelcome surprise. They're being held to higher standards. And in today's volatile world, where we have uncertainty related to climate, weather, natural hazards, but also broader economic volatility and geopolitical volatility, organizations are widely trying to get their hands around how all of these things impact them and what they can actually do about it. 

So, I would say the conversation has really shifted from understanding risk and quantifying it to actually building out plans to manage it and build resilience within their organization. 

A lot of our clients already have climate risk assessments done. They've developed the modeling outputs. They've done their disclosures and they've reported out across a variety of different regulatory environments and different disclosure regimes, what their exposure is to climate risk. But global losses continue to rise, the protection gaps remain significant. And we know that clients are now looking to say, how do I link this climate risk disclosure to tangible business output? 

Climate is affecting insurance availability, capacity, pricing. Clients are seeing scrutiny from their insurers around risk quality and their preparedness for future climate impacts. So now organizations are beginning to view resilience actually as a strategic business capability rather than just compliance.

Joe Peiser (03:58)
No, Liz, I  just want to go back for our listeners and you use the term protection gap. And what we see is that more than half of the global catastrophes that we experience, more than half of it is uninsured even though it is insurable. Is that right?

Liz Henderson (04:15)
That's exactly right. And I think linking, you know, you can't just understand the hazard and the physical impacts and the economic losses when these events happen. The question of whether a risk is insurable is pretty complex. You need to understand the data, the modeling. There has to be capital and appetite. There has to be the right regulatory environment for insurance to come in. But these things can all be solved and the protection gap can be closed. 
And I think organizations especially global organizations with complex supply chains really are seeing that insurance is a critical enabler for them to be able to continue doing their business. And closing that protection gap is part of that enablement.

Joe Peiser (04:58)
And we're seeing that right now with the growth of data centers across the globe. And increasingly I hear among investors and financing teams that if it's not insurable, it's not bankable. Right. Increasingly it's taking on importance, including where site selection for future data centers, what is the climate exposure to that site. 

So I think it's safe to say that we're no longer at a time where that there's a question if climate risk exists. The question is whether organizations can demonstrate that they're prepared for it. 

So this means that the issue of climate resilience is moving out of a sustainability or environmental function and right into the C suite. It's becoming a board-level discussion. It influences operations, continuity, earnings, and access to capital as well as insurance availability. So, increasingly, we're seeing insurability, as you said, emerge as an important signal of resilience. When insurers, lenders, and investors begin asking the same questions about climate, that tells you that this has become a business issue, not just an environmental one.

Liz Henderson (06:11)
That's right.

Joe Peiser (06:12)
Let's stick with this C-suite focus. Historically, many organizations viewed climate resilience as a cost. Increasingly, we're seeing it as value protection, right? Actually, strategic. 

So, if your assets are becoming harder to insure and your operations become more vulnerable to disruptions, or investors perceive greater risk in your business, that's now having real financial consequences. 

So at Aon, we're spending a lot of time helping clients think about risk capital. What we're seeing is that resilience can influence the cost and the availability of capital in exactly the same way it influences the availability of insurance. So what would you like to add here to Liz?

Liz Henderson (06:57)
I think that's great. And in my mind, I was at a panel a couple of weeks ago during London Climate Week. And I know we are talking about New York Climate Week. So, this is something where I expect the conversation to continue. 

But we're sitting next to a banker who's looking at his commercial loan portfolio. And he said something that stuck with me, which is in his mind, insurability can become a credit risk for the investors and the lenders. And that's exactly right. If you cannot secure insurance over the duration of a loan or the value of the asset, I mean that does because comes something that can create a default in the repayment or reduce the value of the asset that's being lent against. 

And so, insurability is absolutely a board level and C-suite question. 

I think the other thing that we're seeing is people are recognizing that it is not just about the physical damage that natural hazards can impact or have on buildings. 

They disrupt supply chains, they can impact contracts, people, data centers are a great example, as you mentioned, around how climate risk can impact downtime, can create issues around water supply and have related costs for cooling in when heat stress and heat waves become more regular.

And so that recognition of the interconnectedness of climate risk across the value chain, I think is really driving some of the conversation and why it's being seen as a more broad business risk. 

Ultimately, resilience affects business continuity, asset value, investor confidence, and long-term competitiveness. But I think what we're also seeing is that companies still lack visibility into where their asset level vulnerabilities are and they also struggle to identify what kinds of investments will genuinely reduce risk. 

And if organizations can't demonstrate resilience, they may face increasing challenges in securing that affordable insurance capacity at favorable terms. So what we're seeing from insurers, and I think also investors, is asking for evidence, not just intentions. Capital providers, whether it's risk capital or other, they want to see that you can prove out what your resilience strategy is and how it's actually going to impact your balance sheet and make your company more competitive, more profitable, and more resilient that can stand the test of time. 

They want to understand what companies are actually doing and they want to see the proof. They want to see the evidence and the analytics. They want it to be measurable. They want to see improvements in risk qualities and understand how those resilience investments are demonstrated over time.

Joe Peiser (09:46)
Modeling today, modeling decision tools and analytics, all increasingly informed and driven by artificial intelligence, are answering the question that historically CFOs have always asked, which is, what's the return on my investment if I take certain measures? We now can answer that question. But given that, Liz, what are some of the mistakes that you're seeing companies are making in this regard?

Liz Henderson (10:13)
I think, you know, you hit on it. AI, machine learning, and advanced technologies are really making the data and the analytics far more accessible, far more powerful, and far more predictable than they've ever been in the past. 

But I think what we fall into sometimes is companies treat the analytics as the endpoint. You can generate a lot of data, you can create climate assessments, you can start to quantify what your risks are, but the that report or that information sits on a shelf. You don't know what to do about it. You don't know what decision to make related to that climate data or that weather data. I think you also, and that to me, that manifests itself in organizations who fail to prioritize. So they can't determine maybe which assets face the greatest risk, which will have the biggest impact on their business continuity. And they can't always link that risk perception or quantification to the right actions to deliver the largest reduction in risk. 

So prioritizing where you spend your time to reduce risk is a key initiative or key area where I see organizations maybe not always having the right framework to do that prioritization. 

And then I think the other big mistake that I do see starting to resonate more with clients, and I see a shift is that traditionally there's been this separation from sustainability or officers or departments from resilience departments, from maybe regulatory disclosure, climate disclosure teams within organizations, there's the separation from that from the actual insurance strategy. There's a disconnect between the modeling findings and the capital allocation and insurance programs. 

And to me, the biggest opportunity organizations have is to link those two things together: insurability, the price, the terms, the conditions, and the value of your insurance program to your organization is the most tangible outcome from a resilience strategy that you can recognize for your organization in year one as you're building out these programs for a time. So, connecting those is super important.

Joe Peiser (12:29)
There's no question to me that things have changed. We're seeing climate and climate analysis moving from the sidelines at a corporation into the center. And there's also no question that insurers and increasingly financial lenders are asking more and more questions about climate and climate exposure. Instead of it being a tick the box thing, what's a better way to do?

Liz Henderson (12:55)
One thing that we are doing with our clients, and Joe, you know this really well, is first trying to make the data far more accessible to every single one of our clients. 

So climate-related data, hazard data, the modeling and the analytics that go alongside that are now available to every single one of our clients through our investment in the risk analyzers, in the risk diagnostics, and in climate risk monitor. So I think starting with an acceptance and a leaning into that data.

But then as I said before, what do you do with it? You can't just stop with the data. And we have a four-stage resilience framework that we're rolling out for our clients to really help them engage with the process, engage with the information that is available to them, and create a repeatable strategy that doesn't live on a shelf, but actually becomes a part of their regular operations. 

So it's a four-stage framework. 

And first we start with risk screening. Do you understand what your current baseline risk is? Do you understand where you have hotspots today, across not just your operational assets, but across your business supply chain, across where you've got dependencies that may be at risk. Start with that risk screening and then look at how those might change in the future. So, what are those hotspots where you're maybe operating okay today, but we know in the near-term future or medium-term future, it's gonna change drastically.

Second is quantify that risk. So combine tools like catastrophe models, climate analytics, as well as engineering expertise to understand the actual asset vulnerability and the loss potential. And the key here is bringing together not just the modeling output, but that engineering expertise. You need to make sure you don't just look at the hazard, but the vulnerability and the loss potential. Really understand the dollars and cents related to what your risks are.

And then once you've got these high-risk areas, you've identified where there's the biggest exposure concentration or loss potential. Now we can go in and do these deep dives and quantify what are the actual investments you can make to reduce the risk. And not only identify what those investments are, but quantify what the loss looks like after you've made that investment. If you understand that, then you really can get to that resilience ROI. That's the tool, that's the metric that you want to use to prioritize where you spend your money, where you get that biggest bang for your buck. 

But now, step four, you want to make sure you realize and you're able to collect on that ROI. And that's when it comes to connecting those resilience improvements directly to insurance, which is step four, risk reduction and risk transfer. Are you able to demonstrate what you're investing in? Quantify the ROI to that investment and link it directly into your risk transfer and risk capital strategies? 

And that's where you're gonna see the tangible tactical benefit of that activity. 

We're already applying this approach in sectors including ports, energy, infrastructure. You mentioned digital infrastructure and data centers. These are areas where we didn't wanna just understand climate exposure, we wanted to identify practical actions to reduce the risk and support the investment decisions and improve those resilience outcomes.

Joe Peiser (16:23)
Let's face it, that return on investment language is the CFO's language, and that's how things get done. And all of this, we advise our clients, you need to future-proof your organization. and climate is increasingly an issue in the future. 

So as we look ahead the next two to three years, I know I see a number of key trends developing. So I think we'll see resilience continue to become increasingly embedded and central in corporate decision making. It won't just be alongside the business strategy. It'll be the business strategy. 

Resilience will become part of mainstream capital allocation. Organizations will increasingly evaluate resilience investment in the same way they evaluate any major business investment. It's going to be based on measurable returns and value creation. And luckily, we have the tools to measure that today.
I think insurability is going to become a strategic KPI. So increasingly, organizations are treating insurability as a strategic business indicator. Like we said before, if it's not insurable, it's not bankable. 

So, it's going to be — this insurability is going to be measured in much the same way companies monitor their liquidity, their leverage, or other measures of financial health. Maintaining access to affordable and reliable insurance will become a much more explicit board-level priority. 

Next, no question, data and analytics will become more and more integrated. It's only going to get better, right? We've seen amazing progress in the last several years. That's not going to stop. That's going to continue. Climate modeling, engineering assessments, insurance analytics, they're all going to increasingly operate together and drive good decision-making value for companies out there. And then finally, evidence-based resilience — it's gonna become expected. Stakeholders are gonna want proof, as you've said. Right? They're gonna wanna see what have you actually done and what are you doing to protect the investments, reduce risk, and improve outcomes over time. And outcomes means profitability. So is there anything you'd like to add?

Liz Henderson (18:35)
No, I think you're…you've got it spot on there.

I would just say that organizations that's building their resilience today will have significantly more options in the future. And those that wait will find that their choices become increasingly constrained for all of the reasons that you just mentioned. 

Staying on top of resilience and insurability, understanding where the data and the modeling is going. And building a program that helps you to quantify that and measure it over time is going to be the status quo in the next few years.

Joe Peiser (19:07)
Okay, so now I'm gonna ask you a question, right? If you are either a CEO, a CFO, or a risk manager listening today, what's the one thing you want them to remember?

Liz Henderson (19:19)
Yeah, the one thing question is always tough because I can say so much about this. But I think I would just double down on resilience is a competitive advantage. It's not on the sidelines. It's not just about understanding the data. It's a prerequisite for insurability and access to capital. So really think about your organization's resilience to, and you can apply the same thinking. The beauty of this is you can apply the same thinking to climate and natural hazards, but all sorts of sources of volatility. It is a competitive advantage if you can stay on top of it, protect your value, you can unlock growth and navigate in this increasingly volatile world. What would you add, Joe?

Joe Peiser (20:04)
First of all, I think everything you said is going to become expected, right? It's going to become table stakes. Resilience is no longer just about preventing losses. It's actually about protecting enterprise value. 

Organizations that clearly understand their own risks, invest intelligently in resilience, understand that return on investment, and then demonstrate measurable improvements, they're going to be better positioned to secure insurance, access to capital — and therefore, profitable growth. 

We're excited to continue this conversation at New York Climate Week, where resilience is increasingly emerging as one of the defining business challenges of the decade. 

So I want to thank you, Liz. This has been a great conversation. There's a lot for our listeners to take away here. 

And don't forget, listeners, you can find out more about how Aon can help organizations understand their climate risk and improve their resilience and adaptability, and talk to an Aon colleague about these issues by heading over to Aon.com. 

There will also be links to our reports and brochures in the show notes. 

So that's our show for today. Thank you all for listening. Until next time.

Outro
Thanks for listening to this week’s On Aon. Don’t forget to like, subscribe and share wherever you get your podcasts — and visit Aon.com to find out more about Aon. 

We’ll be back next week with our Risk Capital Insight, examining the latest trends and developments when it comes to claims.