Extreme Heat and Wildfires: Tackling a Growing Risk

Intro:
Hello and welcome to this Risk Capital Insight Episode of On Aon.
Extreme heat has been one of big headline stories of this summer — but it’s also a growing business risk.
With heatwaves and wildfires currently affecting parts of Europe and North America, Aon’s Liz Henderson and Josh Turner explore how rising temperatures are straining workers, supply chains, power grids and operations — and what organizations can do now to build resilience.

Liz Henderson:
Hello, and welcome to this Global Insight episode of the On Aon podcast. My name is Liz Henderson, and I'm Aon's Global Head of Climate Risk Advisory. We are recording this episode during a period of extreme temperatures across parts of North America and Europe, with communities, businesses and infrastructure experiencing the impacts of prolonged heat.

Aon's Climate and Catastrophe Insight report in 2026 reported that last year extreme heat caused at least 25,000 global fatalities and major economic impacts. Meanwhile, parts of eastern Montana just last week reached a sweltering 118 degrees Fahrenheit. It's more than 47 degrees Celsius, and the hottest temperature ever recorded in the state. Western Europe has also been suffering. Two weeks ago in Barcelona, Spain, temperatures reached over 40 degrees Celsius or 104 degrees Fahrenheit, the highest temperature in over a century of data.

In fact, Europe's June heat wave has already been provisionally linked to at least 12,000 excess deaths across nine European countries. The WHO has called this an urgent public health emergency, noting that Europe has lost more than 200,000 lives to heat over the past four years alone.

And this isn't just a public health story. As well as it being a human tragedy, extreme heat is increasingly becoming a business risk.

Unlike floods, hurricanes, or wildfires, heat doesn't always leave behind visible damage, yet it can create meaningful financial and operational impacts for organizations.

It's a timely topic to be discussing as we are finishing out our summer and we're getting ready to continue talking about the impacts of extreme heat leading up to our event in New York Climate Week in September, where heat is going to be front and center, a conversation point.
Today, though, I'm excited to be joined by Josh Turner, who is our climate advisory product manager at Aon. We're gonna talk a little bit more about how heat is impacting our clients. Josh, thanks for being here.

Josh Turner:
Thanks, Liz. Great to be here.

Liz Henderson:
So I want to talk about why extreme heat is becoming a growing business concern. As I mentioned at the beginning, heat is impacting businesses and has been impacting businesses for a long time. It's not new, but why do you think it's something that our clients are paying attention to now?

Josh Turner:
Yeah, thanks, Liz. I think a few things are happening all at once.

First, heat events are simply becoming more frequent, more prolonged, more severe. The World Meteorological Organization confirmed that this year marks the hottest June ever recorded for Western Europe. And even in the last 50 years, Europe has warmed by around two degrees Celsius.

Second, extreme heat is now reaching places that were never designed to cope with that amount of heat. In Europe, most residential and commercial infrastructure was built to trap heat in the winter, being typically colder climates, but not expel it in the summer. And that's the building materials, the way that the buildings are constructed. Air conditioning is a rarity in many places.

And when a 40 degree day hits, communities, businesses, they're just not equipped to deal with that kind of heat.

And then third, this is pretty important, but the volatility is increasing. Extreme heat waves are becoming more common as the climate is shifting in ways that make historical averages a pretty unreliable guide for planning.
The science behind this is pretty robust and consistent across climate models and embedded in IPCC data.

Our own data shows that more than 30 million Americans are currently living in areas that may experience 90 or more additional extreme heat days per year — when you combine in heat and humidity — by the end of the century.

And finally, organizations are really starting to understand that the financial exposure to extreme heat is real and material, and that's driving them to pay closer attention. So Liz — one phrase we hear often is that heat acts as a risk multiplier. What does that mean in practice?

Liz Henderson:
That's a great question. And really the philosophy that I take when I think about what does climate mean in general to our clients and to our business, it is not a siloed issue. It is a something that is integrated and embedded across all of the value chain of the clients that we work with. It's a risk amplifier in general. So across different industries like the food industry or construction, they might be worried about worker productivity, business downtime, crop impacts. And the underlying cause of those things is climate change risks and things like extreme heat.

And so you have to really look at these issues in terms of that amplification and that integration with the risks that are affecting your business already. So it doesn't exist in isolation. And we know extreme heat in particular amplifies risks that organizations are already facing. It can drive up electricity demand precisely at times when the reliability of the grid is under stress. It can worsen drought conditions. It can elevate wildfire risk, which is why we're seeing simultaneous heat and fire pressures in parts of Europe and North America right now.

It can create cascading workforce and operational challenges, productivity drops, worker health and safety becomes the priority, food systems and supply chains are strained.

What I think makes heat particularly challenging from a risk management standpoint is that all of these effects can occur simultaneously within the same period of time across multiple geographies.

So it's really important to be creating programs and solutions to manage it.
And I think when people imagine extreme heat or they think about it, they really just think about their own discomfort or their public health impacts. That's generally what starts to make the news and what you're feeling in the moment.

But from a business perspective, we know that there are some significant consequences.
So what should our clients be paying attention to when you're talking to them, Josh? What are you hearing them ask questions about? What are they paying attention to for the impact that extreme heat has on them?

Josh Turner:
Yeah, so I'd say that there are definitely some distinct channels through which extreme heat affects their business operations. And a couple of them you've already touched on, but I could break it down in a couple of different ways.

The first is through workforce and labor productivity, as you mentioned. We model extreme heat impacts through heat index, as I mentioned before, the combination of temperature and humidity. It's a commonly used measure by the Weather Service and others that combines temperature and humidity because it's a far better proxy for human productivity and health and safety than temperature alone.

So when the heat index climbs above critical thresholds, work-rest cycles have to begin at higher levels, stop orders may even become necessary.

So for industries like construction, agriculture, or any industry with outdoor labor, this translates directly into downtime, business interruption.

And it's not just a productivity dip. In operational shutdowns, in some locations cooling breaks, water breaks, or entire shutdowns, are mandated for safety reasons.

This can effectively mean construction delays, project disruptions and then, of course, mounting costs.

Now, on the food side, lower crop yields can cause higher food costs from supply chain disruptions, heat and drought can go hand in hand. And our projections show that high drought conditions, for example, may threaten more than half of the global supply of coffee crop, as an example.

A second channel is through machinery and equipment, so in heavy industry. For sectors like manufacturing or even data centers, high ambient temperatures can cause performance degradation well before they cause outright failure.

So we're looking at two different questions. At what temperature does derating begin? And at what point does force shutdown or equipment failure occur?

And so clients are asking us to model those kinds of questions now.

The answer varies significantly by industry and machinery type. So we need to embed engineering expertise alongside climate data and analytics to answer these kinds of questions.

And then I'd say the third is through energy demand and cooling costs. As you mentioned, stresses to the grid and things of that nature. So our projections show that in the US, increases in cooling demand of 20%–50% can be expected by mid-century under even a moderate emissions pathway, with some of the highest relative increases in areas less accustomed to extreme heat like New England.

When temperatures spike, power demand also surges. But that's also, as you mentioned, when the grid is under the greatest stress, creating a dangerous feedback loop.

It's estimated that climate change could reduce the average capacity of US thermoelectric power plants, for example, by 5% to 15% by 2050. And so energy costs rise, cooling systems are pushed to their limits, and in some cases, utilities face a choice: curtail production or face equipment damage. And then, of course, there are transportation and logistics disruptions. Rail lines buckle, roads deform, airport operations are constrained.

We've seen all of these in the recent European heat waves.
For businesses with time-sensitive supply chains, multi-day extreme heat events in a logistic hub can cascade into significant revenue impacts far from their source.

One of the unique challenges with extreme heat is that the impacts rarely happen in isolation, as you alluded to before.
Liz, how are organizations thinking about those interconnected risks?

Liz Henderson:
I think, Josh, like you said, it's an issue that can affect a business across all of these different areas. But also it affects the supply chain and the dependencies that exist within those and how those organizations that understand the risk within their supply chain will be able to identify where there's potential issues in the future.

But I think one thing just to kind of hit on is the interconnectedness of these risks mean that it's incredibly difficult for organizations to really understand and model how one extreme heat event or period of time can impact across all of these different types of organizations.

And you mentioned specifically the impacts on energy demand and the reliability and resilience of the grid to be able to manage power surges that are driven by extreme heat.
When you layer that issue alongside the massive increase in demand in power being driven by digital infrastructure and the build-out of data centers, risk managers are really struggling with trying to balance the impact of that increased demand that coincides with potentially extreme heat and how that will also drive increased demand in the future. And so this interconnection, these decisions that sometimes will happen in one part of the value chain, where to build my data center and am I taking into account extreme heat there, versus really understanding where to put manufacturing or where to put your new offices?

You don't necessarily see those two things happening at the same time. And taking that into account when you're trying to make decisions about the future and where your business will operate is going to become increasingly more important.

So, I think we talk a lot about supply chain visibility in climate risk assessments, precisely because many organizations don't know how exposed their tier two or tier three suppliers are, and they don't know what other constraints or other decisions might also be impacting the same power or the same resources that they're depending on for their business.

So, we have to understand the operational interdependencies. We have to map out where those critical dependencies lie so that we can create kind of holistic and complete risk assessments.

We're also seeing that extreme heat on its own has a significant impact on wildfire. There's a strong connection between extreme heat and wildfire frequencies.
So I'm based here in Chicago, and just over the last few weeks across the Midwest and even to the east coast of the United States, we've been feeling the impact of a very active wildfire season in parts of Canada where fires have been raging and causing massive smoke blowing across the continent.
So, Josh, can you talk a little bit about the relationship of extreme heat and wildfires? And really when you combine those two things together, we're get we're seeing much larger and more extreme events.

Josh Turner:
Yeah, absolutely, Liz. So heat and drought definitely together create weather conditions under which wildfires ignite and then can spread rapidly.

So heat can dry out vegetation that's already dry through lack of rain or prolonged drought. And as you mentioned, we're already seeing that in Europe and North America this summer, where the heat has been accompanied by worsening drought and then thereby this wildfire risk.

But the business impact goes beyond the fire zone itself. As you mentioned, we've seen in the last few weeks smoke blowing across North America and impacting areas like Chicago, where you live, and in the Northeast US, creating worse health challenges, elevated risks to human health.

And for organizations and industries with outdoor operations — power and energy, agriculture, construction — a smoke event can effectively function as a stop work order, even when the physical fire is quite distant.
This is what we mean by compound events. The combination of all these climate factors can simultaneously affect workforce health, energy supply, logistics and so on, all within a seasonal window.

Liz Henderson:
I remember hearing, Josh, that during the really high smoke days, if you walked outside, even for a few minutes, it was like smoking ten packs of cigarettes in one day. And that's the kind of health impact we were experiencing. It's scary sometimes.

Josh Turner:
Yeah, I mean, we live in California. So we definitely have experienced that quite a few times in the last few years. I've been here for 10 years and it's happened a few times, where you go outside and the sky is an eerie orange color and you can see and smell the smoke right in front of you.
One of the things that makes extreme heat unique is that organizations can experience financial losses and interruptions without any physical damage.
How does that change the way organizations think about risk? And how do we approach quantifying that?

Liz Henderson:
It's a real challenge. And I just want to acknowledge, I don't think that we really have a great set of solutions, at least within the insurance industry at the moment, that get us to the point where we can really model and quantify the impact of extreme heat the way that we can for other catastrophic events like wildfires and floods and hurricanes.

And I think it's for a number of reasons. If you think about a hurricane, and the damage that caused, it's physical. You can see the impact. You can take pictures of it. You can you can estimate the repair costs. You can track data. I mean, the industry has been tracking claims data for natural hazards for decades and decades. And that data is incredibly important to have so we can understand and learn when these events occur. How much do we think they might cost us?

But that's not true of extreme heat to the same degree because it's an amplifier of other damages, whether it's operational disruption, whether it's health outcomes, workers' comp, or worker health and safety. We don't always know or have good and reliable data that help us to look at the what's happened in the past and the cost of it. How does it manifest itself throughout an organization? So we really need to do some research around it. I think it's something that we're starting to. We have some methods and methodologies we've begun to develop. And I'm really excited about the work we're doing in this space because it like I said, it's a white space area for the industry. It's something our clients are demanding from us. And we really need to make sure we're rising to that challenge.
So what are we doing about it, Josh? What does the modeling actually look like for extreme heat?

Josh Turner:
Yeah, I think fortunately we are well positioned to answer some of these questions. And so really where we would start is defining what a heat event even looks like. So drawing on both historical weather data and projections that we have from downscaled-bias, bias-corrected climate models, we can estimate the frequency, intensity, duration of these kinds of heat events across geographies, different regions and climatologies, and across time horizons into the future, where we know the temperatures are changing quite a bit.

So there's high confidence in temperature projections and climate models, which enables us to perform this kind of analysis. So from there, it's important to bring in some kind of engineering expertise to really evaluate what the specific impacts are from extreme heat on different business types, depending on the particular impact channels like the ones we mentioned before. So the impacts to labor, to machinery, to power.

So as the awareness and modeling of those kinds of losses grow, Liz, can you imagine organizations starting to consider things like risk transfer?

Liz Henderson:
Absolutely. Especially as an insurance industry, really digging into understanding and building up the models, really being able to link extreme heat events to business losses, we really start to get close to the point where we can design pretty sophisticated insurance products around it.

One of the things that I always say is something can be insurable if we have the right data and understanding in order to set a price and to set a product, design a product around it.

And so we're getting close to being able to do that. But already there are opportunities for risk transfer to play a role when you've got heat-driven system failures like a power outage or construction delays or a cooling system breakdown, or even things like crop failure and the triggering or relationship between heat and drought that could result in issues related to crop yields.

There's growing interest in insurance, particularly in the parametric space, that structures a trigger based off of measured climate variable like temperature or heat index that can be used to offset some of those costs.

That's the kind of solution that's available today. And we're going to get much more sophisticated in being able to design other products and other types of innovations around heat as we get better about the modeling and the data.

Josh Turner:
Yeah. And I think one sector where that challenge is particularly acute is power generation. We've touched on this a couple of times, but can you walk us through what Aon's analysis shows about heat risk to the power grid?

Liz Henderson:
Yeah, and this is a great piece of research that we've published that I like because we're using our climate data really to try to drive some insight and understanding tangible insight that our clients can use to make decisions around.

I've talked about digital infrastructure build-outs. I've talked about how the surge in electricity demand driven by extreme heat is happening at the exact same moment that we're building or creating demand of power plants and power and the grid based off of data center build-outs and looking at and really understanding how much of our grid will be exposed to extreme heat is pretty important.

We project that by 2050, around $228 billion of economic value from the utility sector alone may be generated in areas that are projected to be highly exposed to extreme heat compared to only about $16 billion of economic value today.

So this is really going to become an almost existential issue for the grid. Fossil fuel thermoelectric plants are particularly vulnerable. Up to 243 gigawatts, or 18% of total generating capacity, could be at high risk from heat by the mid-century under even the most moderate emissions pathways.

So that's enough electricity to power more than 40 cities the size of New York during peak demand just to put that into context. And it's being put at risk at exactly the moment that the demand is growing fastest.

Josh Turner:
Yeah, and that's where AI definitely plays a part in the build out of digital infrastructure.

Liz Henderson:
Absolutely.

Josh Turner:
So understanding the risks is one thing, but preparing for them is definitely a whole other thing. What advice would you give organizations that want to strengthen their resilience to extreme heat?

Liz Henderson:
I’d organize it into sort of three areas.

The first is risk identification and quantification. So we have the data today to look at your organization, to look across your supply chain, to understand where you are exposed and where you think that exposure will become more meaningful. You cannot manage what you cannot measure. So the good news is that we have data to be able to help with that very first step of looking at where you have heat exposure for your facilities, for your organization, and also across your supply chains and critical dependencies like the grid.

And then the second is resilience. That means you have to develop risk mitigation and adaptation strategies, heat action plans, adjusted work schedules, cooling provisions. It means infrastructure and facilities planning, retrofitting, upgrading HVAC systems, ensuring you have backup power, and really starting to put together what is the totality of steps that you need to have a robust risk management program in place to manage heat? So looking at what your organization is able to do today, and then create those mitigating steps to offset the risk when these types of events occur. And so for the way we think about that with our clients is that we're looking at measuring the risk, we can model it across your portfolio and then we bring in and work with our risk engineers who are empowered with all of the same climate data, but can work with you to identify where the biggest bang for your buck will be in terms of investing in that resilience. So maximizing that return on resilient investments.

And then third is risk transfer. We approach all of these types of challenges from that position of we want to start by understanding the totality of your risk. We want to create a holistic program that takes into account the mitigation and adaptation strategies that you can use.

And then the final thing is what's left over? What can't you mitigate away? What is there that for the worst day in your organization, what type of financial support do you need to come in? And so we can bring in that risk transfer component, whether it's traditional insurances, whether it's changing the mix in your program or bringing in new products like parametric to help manage the totality of risk that you're facing.

Josh Turner:
Yeah, thanks, Liz. We've definitely covered a lot of ground today from extreme heat in the headlines to the mechanics of how heat affects business to the energy sector's particular vulnerabilities here, to how we're modeling these events and their effects. If listeners take away one message from our conversation, what do you think that would be?

Liz Henderson:
I think, don't think of extreme heat as simply a weather issue or simply a thing of the past. It is something that we are going to be experiencing a lot more. One stat that I like to use is I think two years ago, Southeast United States experienced very extreme heat. Sorry, south southwest United States, like Arizona experienced very extreme heat where Phoenix was above 110 degrees Fahrenheit for 30 days straight or something like that. In past climate models, an event like that was modeled to be around once every 250 years. But today, we think that type of extreme heat wave is modeling in at about once every 15 years.

This is not going away and it's going to happen more and more. We know that it will affect people and drive real financial impact and human impact that we want to be able to measure and understand the interconnectedness of those risks.

Josh Turner:
Yeah, and I would add that organizations don't need to predict exactly when or where the next extreme heat event will occur. It is a fact that they will happen. The focus should be on understanding what the impacts are today, how they might change, and then taking practical steps to be better-prepared for those more frequent, severe, longer duration events in the future.
So the tools to do that already exist climate analytics, vulnerability modeling, risk engineering, scenario planning and they're more accessible than ever.

Liz Henderson:
Excellent. Thanks for that, Josh.
That's our show for today. Thank you all for listening.
To learn more about how Aon helps organizations better understand and manage climate-related risks, visit Aon.com.
In the coming months, we'll continue exploring the trends and challenges shaping business decision making around the world. Thank you. Until next time.

Outro:
Thanks for tuning into the latest episode of On Aon. If you enjoyed this episode, don’t forget to like, share and subscribe wherever you get your podcasts and be sure to visit Aon.com to learn more about Aon.

We’ll be back soon with another episode — our Risk Capital Insight — when we’ll be talking about one of the biggest issues facing companies: Supply Chain Disruption.