Senate Budget Committee Issues Testimony From Aon President Andersen

WASHINGTON, April 19 -- The Senate Budget Committee issued the following testimony by Aon President Eric Andersen involving a hearing on March 22, 2023, entitled "Risky Business: How Climate Change is Changing Insurance Markets":

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I am Eric Andersen, President of Aon and a 30-year veteran of the insurance industry. On behalf of my 50,000 colleagues at Aon, I would like to thank Chairman Whitehouse, Ranking Member Grassley, and each member of the committee for the opportunity to testify on the role that insurance can play in mitigating climate risk.

Climate risk is a global, systemic risk and the insurance industry is a bridge between public risks and private capital. At its core, our business is about creating resilience to both protect the assets of today and foster the growth of tomorrow. We do this by spreading the impact of risk across a wide community of financial participants across time to help people and businesses withstand volatility; to have the resources and confidence to invest, and to protect and rebuild when necessary.

We believe that properly managing climate risk not only protects against the downside, but can also be a catalyst for growth. Through publicprivate partnerships with the government, Aon and others in our industry have helped the US and other economies weather the volatility created by every conceivable crisis from the Great Recession to the terrorist attacks of 9/11.

In each of those events, we got to witness up close the displacement and what it does to people, what it does to businesses, to communities especially those that are not prepared or don't have the right protection in place. In a time of increasing volatility, the ability to innovate: to leverage private market capital by protecting the investments will allow our economy in cooperation with the government, to leverage the power of the private market to mitigate the impact of volatility on economies and communities.

Anyone who cites the difficulty of placing risks for either traditional energy sources or new green technology should recall what US mortgage risk felt like in 2010 in the wake of the financial crisis. The insurance industry, led by Aon, developed a new risk transfer product that took risks from Fannie and Freddie and transferred them to the reinsurance markets. Ten years later, this public private partnership exceeds $40 billion and the models and discipline allowed - maybe even facilitated - an orderly transition of the secondary mortgage market that carries through to today.

Just as the the US economy was overexposed to mortgage risk in 2008, the economy today is over exposed to climate risk. To solve this, we have two choices: we can shrink the amount of carbon emitted by shrinking the amount of economic activity - we can make less steel, build fewer buildings, travel fewer places - or we can make new markets. Obviously the first choice is no choice at all, so how do we mitigate the risk of investing in a technology with no track record?

Capital will not go where it is not protected, nor will it go where it cannot expect a return, regardless of either the moral imperative, the political demands or the communal self-interest. This is why public-private partnerships are so important.

There are examples of how these partnerships work.

In 2021 the World Bank, Aon and USAID teamed up to mitigate hurricane risk in Jamaica through catastrophic coverage. The bonds will deliver $185 million in immediate liquidity post event insuring not only humanitarian relief in the case of a windstorm but facilitating immediate natural catastrophe events in 2022. Globally, the total number of catastrophe-related fatalities has remained below average for 12 years in a row; however, more than 19,000 of the fatalities were heat-related deaths in Europe alone.

Further findings of the report include:

* 421 notable natural disaster events were recorded in 2022, higher than the 21st century average of 396.

* 75 percent of global insured losses were recorded in the United States, which was higher than the average of 60 percent.

* Windstorm Eunice was the costliest individual European windstorm since 2010, with $3.4 billion in insured losses.

* Widespread hailstorms in France contributed to the country's second-highest natural disaster payouts of Euros6.9 billion ($7.4 billion).

* Droughts and heatwaves severely impacted Europe, the United States, China and other regions and global insurance payouts for drought were the second highest on record, at $12.6 billion.

* Both severe drought conditions and a prolonged rainy season in different regions of Latin America reduced agricultural crop yield across the region.

Aon's role continues to be working with our clients - insureds and insurers, alike - to help build physical resilience, accelerate solutions to market, and de-risk climate-related investments by connecting capital to opportunities.

Recent years have seen weather events drive up claim's costs for businesses, communities, and governments -- increasing the need for real-time catastrophe monitoring, instant response, and rapid assessment of damage. Speed is critical. For communities, it's about determining a safe and effective escape route from a storm.

Governments need to ensure the continuation of essential services. For insurance companies, it's about knowing where to send experts to survey the damage and deliver claims payments to help customers quickly repair or rebuild.

Forecasting

To better inform insurers and organizations about climate exposure as soon as possible, Aon's Impact Forecasting team developed Automated Event Response (AER). AER has a global footprint that covers everything from windstorms in Europe to North Atlantic hurricanes to typhoons in Japan. AER uses windstorm or tropical cyclone forecasts from different meteorological institutions together with catastrophe models, which are overlaid on an insurer's portfolio data to produce automatic predictions of loss each time new forecast data are issued.

Customized reports are sent to insurers automatically within 30 to 60 minutes of a forecast to help quantify the potential geographic scope, severity, and projected cost of the event -- even before the storm makes landfall. Insurers are then better equipped to make more decisions about managing claims adjuster resources, setting loss expectations, and evaluating impacts to reinsurance structures.

AER allows businesses to protect and prepare their physical locations and staff. Consider a retailer with thousands of locations across a region that receives updated forecasts multiple times per day as a hurricane makes landfall. The business can gauge which locations are likely to be hardest hit and how severely, while taking steps to ensure the safety of employees and the site location's security. That knowledge allows companies to prepare early -- often quickening claims processing.

Sophisticated and instant response methods are equally important for assessing damage after the event. Satellite imagery and drones are increasingly used to immediately assess damage, particularly in hard-toreach areas. For example, within 48 hours after an event, Aon's property claims teams fly drones in impacted areas, then immediately send the footage to clients to measure their damage. Real-time footage helps expedite the payment of claims and increases claims assessment accuracy.

Impact on Workforce

As organizations focus on developing a resilient and agile workforce, they also are considering how a changing climate affects health and how that shapes their goals.

This can mean:

* Enhancing plans to help their workforce contend with changing health and safety conditions

* Limiting outdoor work during unsafe conditions

* Developing contingency plans for locations not traditionally considered prone to certain natural disasters, but which are now susceptible

* Ensuring health care access for vulnerable populations.

Together, risk, health, and human capital stakeholders can develop innovative ways to help companies protect their people after natural disasters. Recently, Aon worked with a large technology firm in the U.S. to adapt the trigger for a catastrophe bond (an earthquake, in this case).

Instead of only paying a claim to rebuild the physical office, it now will allocate a one-time payment to the firm's employees to help them through a disruption to their lives due to the earthquake. The catastrophe bond was created 20 years ago to address the loss of physical assets, but now can help people as well.

Reinsurance

Reacting to six years of low returns, high catastrophe losses, and investor pressure, pricing for U.S. property catastrophe and global property retrocessional business hit multi-decade highs on January 1, 2022. Aon estimates that global reinsurer capital declined by 17 percent, or $115 billion, to $560 billion during the first nine months of 2022. Reinsurers are raising prices, limiting coverage, and even exiting some markets to improve returns. New capital formation is currently limited, reflecting significant uncertainties in what has become a very challenging risk environment. Investors are particularly concerned about the impact of climate change and inflation, but there are expectations that the prospect of higher returns will drive new allocations going forward, particularly as the benefit of higher pricing and interest rates becomes visible in earnings.

Recommendations

Carbon reduction has become a near universal goal shared across industries and governments and Aon supports and participates in commitments to reduce emissions. In addition, there are things that Congress should consider, which could make a positive impact on preparedness and resilience.

* Credit risk transfer - Congress should support programs that facilitate the transfer of credit, guarantee, and insurance risk to the private sector and away from taxpayers.

* Budget insurance - Congress should work with FEMA to ensure that states have the certainty they need to buy budget insurance to protect rainy-day funds used to make residents whole after natural disasters.

Conclusion

Climate risk poses substantial challenges to insureds and insurers alike.

While insurance is based on the principle of diversifying risk, in many cases, insurance risk management becomes more challenging as events become more interconnected across lines of business, geographic regions, and perils.

Aon is oriented around the philosophy that big problems need to be solved by collaboration and this has been exactly that, with humanitarian, private, and public sectors partnering to prove that solutions can be found together. Insurance exists to protect that which we cannot afford to lose. And we have a lot to protect.

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Original text here: https://www.budget.senate.gov/imo/media/doc/Mr.%20Eric%20Andersen%20-%20Testimony%20-%20Senate%20Budget%20Committee.pdf