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Re/insurers can help accelerate net zero by facilitating capital: Aon’s Dudley

30th January 2023 - Author: Kassandra Jimenez-Sanchez

As the re/insurance industry is feeling the emerging impacts of climate change, it also has the opportunity to help solve the climate crisis by matching capital to risk where it’s needed – such as via clean tech solutions, by de-risking projects and technology development -, Richard Dudley suggests.

Aon’s Global Head of Climate Strategy believes that, re/insurers the industry now has a chance to transform volatility into opportunity and do more in improving resilience as the economy evolves.

In Aon’s recent annual catastrophe insight report, Dudley shared three primary ways the industry can help accelerate the journey to net zero emissions, which in turn can encourage faster and more meaningful investment.

In his first, he suggests that instead of moving away on arbitrarily short timescales from carbon-intensive and high-emission industries, re/insurers should be enabling and supporting these industries to transition to lower carbon operations.

“This can be done by both supporting and incentivizing these industries to transition, and by de-risking investments in low-carbon technologies, for example carbon capture and storage and new types of renewable energy,” he said. “In order to fully grasp this opportunity, the re/insurance industry must change some of its mindset to formulate a consistent forward-looking pricing model for new risks.”

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Second, Dudley added, the industry should consider the need for longer policy terms than the usual annual renewal cycle. For example, new cleantech energy industries are not investable at scale, and re/insurance coverage’s stability and predictability over longer periods could free up capital flows, he noted.

“This “duration mismatch” is impeding financing for green technologies as the long-term insurability of assets comes into question — which in turn increases risk for investors,” Dudley explained.

“We’re leveraging the existing longer term approach in some existing lines of business and working with new and existing capital providers to increase appetite for longer-term risks. Working with pension and investment markets could also inform longer-term thinking about assets and liabilities — enabling us to apply these insights to the general reinsurance world more systematically.”

As his final point, Dudley highlighted that the re/insurance industry must collaborate and innovate with stakeholders, including existing and alternative sources of capital, green technology startups, risk mitigation firms and the public sector.

This needs to happen so that society can decarbonize at scale, he explained.

“As a recent example,” Dudley added, “Revalue Nature, which provides nature-based carbon offset projects, collaborated with Aon to insure those investments against unforeseen events such as wildfires or bug infestations.

He concluded: “Decarbonization is changing the risk landscape and any un-insurability of increasingly volatile weather presents a risk to our economy. But by engaging new talent, partners and stakeholders, the re/insurance industry can play a truly transformational role in the climate transition by enabling better decisions for a more sustainable future.”

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