Aon’s Henderson: Cat models are the “language” of risk transfer
The “journey” from the science to cat models has never been more critical, according to Aon’s Liz Henderson, as the industry continues to struggle to keep up with the pace of climate change.
The Insurer TV spoke to Henderson immediately following her appointment as leader of the Aon’s new Climate Risk Advisory team.
The new climate unit has been created to help clients meet their reporting and disclosure requirements, as well as reduce risk, by providing forward-looking diagnostics across a range of climate scenarios in key geographies.
By combining catastrophe and climate change models from Aon’s Impact Forecasting and third-party vendors with input from Aon’s capital, climate and credit specialties and global academic collaborations, the new offering will include climate advisory frameworks to facilitate an end-to-end approach to risk modelling and management.
Henderson, who previously served as co-head of Reinsurance Solutions’ US catastrophe management team, referred to cat models as “the language of risk transfer”.
“We need to bring them into a conversation, because if you want to do anything with the risk on your balance sheet, you need to have capital markets, reinsurers, insurers at the table to help build out a product to mitigate that risk; and if you don't speak the same language and you don't have agreement of what the view of risk is, you're gonna have challenges.”
According to Henderson, the science and data that feed the models are evolving quicker than the industry is able to access it.
“We need to get [the science] into the hands of people who make decisions about risk and these newer entrants into the risk modelling world need to be able to tap into that right away as well,” she said.
“That whole journey is so critical, and we need to advance the state of the science so that cat models can keep up with the changing climate,” she added.
Announcing the new unit, Aon noted that as the number of extreme weather events rises – with more than 400 natural catastrophes causing $313bn of global damage in 2022 – it is increasingly crucial for companies to adequately quantify the impact of climate risk.
While acknowledging the current cat models are “good” at informing users on “the risk of today, and maybe a few years from now” and how exposures within a portfolio will respond to a cat peril based on information from hundreds and thousands of claims, Henderson said it's important to focus on how risks will evolve in the future.
“We're certainly getting closer and closer to being able to bring future climate modelling data into the standard framework of catastrophe models,” she said. “But it is a little bit of an evolution of how we're using the cat modelling data.
“When you think about what the climate models tell you, they're global, they're continental at scale, they're forward looking. You have to be able to take that kind of global, forward data and link it back into that foundational framework of what is it actually going to mean in terms of event frequency, severity and behaviour, and then take those learnings and look at how exposures are going to change as the hazards change,” she explained.
But to do this, modellers need access to “new data” and the way to do this efficiently – in Henderson’s view – is through academic partnerships.
“What we've been doing at Aon is trying to accelerate that process by partnering directly with academic institutions,” she said.
“For example, in the US, we partner with Columbia University to help understand exactly that question. How is climate change going to impact the behaviour of hurricanes? Where will they make landfall? How severe will they become? And how the different parameters of a hurricane are going to ultimately affect the loss?”
Speaking to The Insurer TV on its Close Quarter programme about her new role, Henderson said she was both “honoured” and “excited”.
“I've been in our catastrophe risk modelling team for a long time and that's really where our expertise is in climate risk,” she said.
“The insurance industry has been thinking about climate change and climate risk. It's our bread and butter of what we do.
“We’ve been working with clients in the insurance space to help them to quantify their cat risk and underwriting price for it for some time now. Structuring and transferring reinsurance solutions is the foundation of what we're trying to build into our Climate Risk Advisory team and bring that expertise and that investment in analytics to more Aon clients and a broader set of users of this data,” she concluded.
Watch the 13-minute interview with Aon’s Climate Risk Advisory team leader Liz Henderson to find out more about the newly created unit and how to manage the evolving impact of climate change on nat cat risk exposures.