On Aon Podcast: The New Risk Capital Playbook for Today’s Business Leaders

Intro  
Hello and welcome to another episode of On Aon.  

On Aon is Aon’s global podcast that explores the top issues affecting businesses around the world with each week dedicated to either a Risk Capital, Human Capital, Industry or Global topic. 

This week it’s our Risk Capital Insight, which looks at the main risks organizations are facing — and also how they’re responding to them.  

And we’ve got a great episode for you.  

• Joining Ciaran Healy, who’s Aon’s Global Captives leader is  
• Joe Peiser, who’s just been appointed Aon’s CEO of Risk Capital.  

Together they examine the changing nature of risk and risk management, and the decisions business leaders are making to protect their balance sheets 
 
Ciaran Healy (00:00) 
Hello and welcome to this Risk Capital Insight episode of On Aon podcast. I'm Ciarán Healy, Global Captives Leader at Aon.  

And today we're talking about how risk capital dynamics are evolving, why organizational risk profiles are changing, and what it means for leaders trying to protect their balance sheets in a far more volatile world.  

And joining me to take a deep dive into these topics is Joe Peiser, who has recently taken on the role of CEO of Risk Capital here at Aon. Great to have you here, Joe. 
 
Joe Peiser (00:28) 
Kieran, it's great to be here. And I just want to say before we get started, at the time of this recording, unfortunately, violence has broken out in the Middle East. And our thoughts are with our colleagues, with our clients, and all the folks in the Middle East. And it's just another example of the uncertainty that our clients and prospects are facing in the world.  

But our thoughts are with them. And of course, we wish them well. And we hope for a speedy resolution of the conflict. 
 
Ciaran Healy (00:56) 
Well said, Joe. And it leads on to my first question. You've stepped into a role at the moment when risk profiles are shifting rapidly, and what you've talked about is an example of that. What's driving the change, and why does it make Aon's focus on risk capital so relevant right now? 
 
Joe Peiser (01:11) 
Ciaran, thanks for the question. Over the past, I'll say six to eight years, we have seen a significant change in the volatility, the external volatility that our clients face. We've identified four megatrends that are the underpinnings of this volatility. And that includes weather, workforce, trade, and technology. As we have our conversation, I'll dig a little deeper into each of those. 

But essentially what our clients are facing is external volatility that they haven't faced before of the magnitude. So, there is a systemic change in the severity of losses that our clients face.  

Now this is a risk capital discussion, so I'll talk primarily about those issues. I mentioned weather as a megatrend. There's no doubt that weather patterns are different today than what we saw 10 years ago. We're seeing unusual weather activity. We're seeing floods in Dubai, for example. We're seeing wildfires in Europe.  

It used to be we could expect windstorms in Florida or south-east Asia, but now we're seeing very unusual activity. And in addition, it's happening in places where our clients and our prospects have significant values at risk. So weather is one of those issues. 

In addition, cyber, Ciaran, cyber is a risk that didn't even really exist 15 years ago. And today, cyber is the number one risk on the minds of CEOs and boards of directors. We see that in survey after survey. So that's a new risk that our clients are facing.  

Also for our clients who have exposures in the United States, the litigation system in the United States just does not get better. We are seeing adverse litigation trends. We're seeing nuclear verdicts.  

And what's different, Kiran, is that if you go back 30 years ago, sure, you could expect crazy verdicts for clients of ours who in the industry is like pharmaceutical businesses or energy. But now we're seeing middle market companies face this kind of verdict, these kinds of verdicts that are really upsetting their financial strategies.  

So, really a reason for the creation of Risk Capital is because our clients are facing this unusual and unprecedented volatility and they're asking for not just solutions, but also ways to, in which we can help them quantify these risks that they face and then deal with them. So much of what we're doing is driven by our clients’ demand. 
 
Ciaran Healy (04:03) 
Super interesting, Joe. And as those risk profiles change and you mentioned the megatrends, I'm observing capital is starting to behave a little bit differently too. In your perspective, what's changing in how capital is being deployed and structured and what role are insurance and third-party capital now playing? 
 
Joe Peiser (04:20) 
It's absolutely different, Ciaran, it's absolutely different. So, I mentioned before that a reason for the creation of risk capital at Aon is our client demand. But the other reason is because we've seen significant changes in the supply of insurance and the supply of risk transfer capacity.  

We no longer see the formation of new insurance companies. We see capital flowing into our business differently. Okay, it's coming in the form of ILS — insurance linked securities — or cat bonds. It's coming in the form of parametric insurance. It's coming in the form of structured insurance  

And, you might say like why is that? Two reasons one the entire business because the loss activity has inflated So has the entire business, right? Premiums are up values are up, etc. And sure, we go through micro trends in the marketplace and we're currently in generally a soft market. 

But the overall macro trend is increasing severity and increasing inflation of losses and premium.  

Now, the volatility that our clients face, the insurers also face that volatility. Now, insurers are in the business of taking volatility. However, this volatility is different.  

As I mentioned before, we're seeing strange patterns or unusual patterns of weather.  

So, our insurers have a portfolio and they're trying to deal with the volatility of that portfolio, which has changed over time. Just like I said, we could expect windstorms in Florida, but who would expect floods in Dubai and wildfires in Europe?  

Insurers are facing that same uncertainty. So, as a result, what they're doing is they're putting up less capacity on any one risk. We call this the fragmentation of the supply of insurance.  

So, at the same time, we see increasing demand, from our clients because of the volatility they face, we're seeing a fragmentation of the supply.  
And the new supply that's coming in is coming in different forms, as I mentioned before. So, a reason we created Risk Capital is because we want to make sure we can access that capital in whatever form it comes in and in whatever market it comes in, because that's how we're going to generate solutions for our clients.  

And third-party capital is very much a part of that. Importantly, third party capital generally does not want to necessarily be in the insurance business. What they want to do is they want to take insurance risk that is not correlated with their other investment risks.  

So, it's very much a portfolio play for them. And the way we can attract that capital is by having quantitative modeling.  

These investors, these third-party alternative capital investors are interested in quantifiable risk that they can examine to see if it does in fact give them relief on their port their investment portfolio.  

So, the analytics that we have created at Aon to help our clients make better decisions on the exposures that they face are also the same tools we're using to unlock this new capital that's coming into the business.  

Ciaran, given that backdrop that I just shared with you, how do you think leaders should rethink their own risk financing? And how should they move from what traditionally has been a transactional approach to buying to better matching risk capital to their balance sheet issues? 
 
Ciaran Healy (08:00) 
That's a fantastic question, Joe. I think this backdrop presents leaders with a real opportunity to rethink how they finance risk in a more strategic way.  
As you state, Joe, the fundamental mission here is to best match capital to risk. So the logical starting point must involve better understanding your risk in the first instance. And this is where data and analytics can play such a vital role. And you spoke about the advancements within Aon it in our capabilities here. But by modeling the risk, ideally on a portfolio basis, leaders can gain insight into how the risk is likely to behave and the volatility that the organizations are exposed to. And this is the starting point in the decision-making process.  

Once we have the insights around the risk portfolio itself, we can start the process of optimizing how to finance it with the best blend of different capital sources, such as the ones that you were talking about there, Joe. This will include insurance, it'll include reinsurance capital, but it also includes alternative risk transfer capital. We're seeing a rise in interest in parametric insurance and the ILS and the capital markets that you talked about, Joe, these are becoming more and more relevant areas that the leaders need to start thinking about as they finance risk.  

So importantly, it'll almost inevitably include the organization's own capital. And this is where the organization's risk appetite becomes an important concept as well. So not as a constraint, so not viewing your risk appetite as a constraint, which is sometimes framed as, but as an enabler or a guide path to success.  

All success has to incorporate some element of risk. And it's how you manage that risk is the determinant between success and failure in a lot of cases.  
So, this may sound a little bit complicated, but the advancements in data and analytics, the different forms of capital being more available than ever before, it actually presents a huge opportunity for leaders and organizations to really put the two together — the changing behavior of capital with the advancements in data analytics to come to  better outcomes and make decisions more strategically rather than maybe tactically, which was perhaps a little bit more prevalent in the past. 
 
Joe Peiser (10:00) 
I can't agree more that the starting place for our clients really is determining their own risk appetite and risk tolerance. And every company does have a different approach to it.  

And we see some of the largest companies in the world, who have the balance sheet to retain significant risk, still exploring risk transfer because they want to preserve their risk-taking capacity for their business risk as opposed to risks that they can hedge in the insurance market. 

So, it really is, each company has to really start with what is their risk appetite and their risk tolerance.  

Ciaran, when you're advising leadership teams today, how do you advise them where a captive fits in their overall risk capital strategy? 
 
Ciaran Healy (10:46) 
Yeah, to me, it's a really important question, Joe.  

It builds on what we were talking about there. Just as context, think the prominence of the captive in the broader risk capital ecosystem is definitely rising.

There's no doubt about that in my mind.  

The traditional use case for a captive as a mechanism to control cost remains as relevant as ever. That's not going to go anywhere, go away, or diminish.

However, in addition to this, what we're seeing is captives being used as connectors and as platforms to access different forms of capital.  

So I'll unpack that just in a moment.  

So let's start with access to capital. I think what we're seeing is with all the different forms of capital behaving slightly differently and the availability of capital becoming more mainstream for corporate risk, the captive is becoming a platform for organizations to access it.  

So not necessarily to retain risk, but to access it. And transform capital markets risk into something that can cover balance sheets and access reinsurance directly — be used as a platform for alternative risk transfer, structured solutions, and parametric insurance.  

So, it becomes a of a melting pot for the organization to attract all the different forms of capital and then make decisions, informed decisions based on analytics, what the best blend to cover the balance sheet risk is going to be.  

So the captive is taking a much more strategic posture within the risk capital ecosystem. And then the connector part, I think, is equally interesting. The captive is becoming more and more of a go-to solution or tool across different types of risk. 

So, it is obviously very prominent in the traditional property and casualty risks, but we're seeing it in cyber, we're seeing it in human capital benefits, we're even seeing capital being used for pensions and other type of risks in the human capital space.  

So all told, what we're seeing is the capital being used as a connector of all the different risk agendas within the organization, and again, aggregate those into one vehicle. 

So what you're starting to see is the aggregation of the risk agenda within the firm into the captive and then using the captive as an aggregator of all the sorts of different capital that are out there that we can match.  

So in a neat way, what the captive is starting to transition into is this tool, this mechanism or this platform to start to get the portfolio view, both in the markets where the capital is and within your own organization where the risk is.  

And then it's a case of using the analytics to make sure that we're doing the matching in the way that best protects the balance sheet. 

So that's a new sort of, or advancing mindset that we're seeing amongst captive owners, which I think is really encouraging because what it's doing is it's really turning the captive into the glue in the overall risk capital ecosystem.  

So I think we're going to see much more of that. When I'm talking to leaders and firms about how to think about risk financing and how they use a captive, there's two themes I talk about. So it's much more about the flexibility as a capital access point, capital efficiency lever and as a connector within the organization as well as and on top of the traditional captive use case of optimizing total cost to risk. 
 
Joe Peiser (13:50) 
It's really exciting, Ciaran.  

I've been working with clients who have captives for decades and they have often used captives to access, for example, the reinsurance market. But there is so much more now, going back to my discussion about the fragmentation of supply of insurance and the way new capital is coming in. The way the captive can access that capital is so vital to so many of our clients. Captives are really becoming the focal point for many of our clients’ whole risk financing strategy. And there's so much more that the captive can also add to risk control and driving down total cost of risk.  

I haven't met a client who has a captive who regrets creating a captive. Quite the opposite. Those who don't have one are often saying, maybe I should have one. The day of the captive is here again and even more important.  

Is there anything else you'd like to add about how large corporations are using captives or small corporations are using captives? 
 
Ciaran Healy (14:46) 
Yeah, I think it goes back to some of the conversation we've had, Joe. So the starting point is understanding the risk and understanding your risk appetite.

And whether you're a small captive user with one line of business or whether you're a very mature captive owner with many lines of business, I think that risk capital mindset is the core piece. And it's how you access the capital using data and analytics. But it's also the way I sometimes contextualize it, the three C's around the captive. There's the cost, which we've spoken about. There's the capital, which we've spoken about but there's also the control.  

So what we're actually talking about here is also opening up optionality for clients, which is more more important in the volatile word that you spoke about at the outset, So the ability to create bespoke programs, the ability to put risks in the captive as an incubator, so not necessarily available in the market today.  

All those things are just tools that organizations are going to need more of, not less of in the future, given the trajectory that we're looking at. If we think about the protection gap, that continues to rise.  

What we're seeing is the captive then being used as an instrument for organizations to deploy their own capital in a way that they protect the balance sheet in a much more deliberate and defined way than maybe if they didn't have a structure such as a captive to incubate risks into.  

I think the way I'd summarize this trend is the captive is moving from a controller of insurance into a controller of capital. And that's a really interesting place to be.  

And I think it opens up a huge opportunity for risk professionals and all captive owners to really start thinking differently about how they're accessing capital, how they're deploying the captive capital.  

And I think that there's huge opportunities within that as mismatches between supply and demand start to emerge in the insurance market, the captive owner is the best position to be able to take advantage of those supply and demand mismatches.  

So, I think that the direction of travel is certainly more around that.  

But again, I go back to the fundamental point: The use case for the captive of optimizing total cost to risk, making sure you're deploying your risk appetite in a deliberate way is still top of the agenda for a lot of captive owners.  

So, there's a lot to think about in the captive and that's the whole point of it. 
 
Joe Peiser (16:56) 
The one place where we're seeing that mismatch that you referred to between risk and capital to take the risk transfer is in the world of data centers.  

You can't read a magazine article, a newspaper article today without the topic of data centers and the explosion of artificial intelligence that's happening in the world today. And what we're seeing now is the sheer magnitude of the data centers that are being built are outstripping the capability, current capability, of the insurance market to respond. So we're seeing data centers being built. They used to be one billion or two billion in values, and now we're seeing 10, 15, 20, 30 billion in values. And many of these are of such a size that the financing requires them to be fully insured.  

So we are exploring new capital for this new and important risk that the industry is facing. And captives are playing such a key part in that.  
 
Ciaran Healy (20:18) 
And one last one for me, Joe. For leaders listening today, what's the first practical step they should take if they want to modernize their risk capital strategy? 
 
Joe Peiser (20:27) 
Well, I mentioned it before, Kiran, the absolute first step is for our clients to determine their own risk appetite and risk tolerance. In many ways, whether they own a captive or not, they are the first-line underwriters of their own risk and they need to understand what they're retaining and then also measure and quantify what they want to transfer. That's the absolute first step. 
 
Ciaran Healy (20:51) 
Joe, thank you for time today. Really enjoyed the conversation.  

So, for summarize what we've heard today, risk profiles have changed. Joe, you mentioned the mega trends and how that's influencing volatility.  

We're seeing capital behave differently and changing, and that's forcing the need for risk financing to evolve within our organizations.  

So super interesting conversation. I think that's our show for today. Thank you all for listening. In the coming weeks, we'll have more risk capital episodes for you, including on trade credit and analytics and diagnostics. So, until next time, thank you and goodbye. 
 
Outro
Thanks for tuning into the latest episode of On Aon. If you enjoyed this episode, don’t forget to subscribe wherever you get your podcasts and be sure to visit Aon.com to learn more about Aon.  

We’ll be back next week with another episode — our Human Capital Insight — where we’ll be talking to a leading global company about the changes it’s made to the way its employees select their benefits.