A Highly Volatile World Demands New Solutions to Navigate Risk

How Aon is elevating data & analytics to prepare clients for the future

Risk is increasing exponentially, and the COVID-19 pandemic showed that risks are also increasingly interconnected and complex. At the height of the pandemic’s impact, for example, 30% of organizations experienced significant supply chain disruption, and even as the pandemic eased, 20 percent reported that sourcing issues remained. Goods shortages, worker health, and building safety can all factor into that single, larger problem.

This presents both challenges and opportunities for organizations and the broader insurance industry that help match capital to risk to help mitigate the impact of new and emerging risks. Since the mid-1980s, the percentage of overall American GDP that is covered by insurance of all types has steadily declined. And according to Aon’s Global Risk Management Survey, nine of the top 10 risks today are either uninsurable or only partly insurable. Eric Andersen, president of global professional services firm Aon, said recently, “Clients are increasingly facing challenges that are more complex and interconnected than ever before. Their needs continue to rapidly evolve and outpace innovation, exposing a troubling gap.” Andersen also notes that backward looking models to predict the future impact of emerging risks are no longer viable.

So, the challenge becomes determining how to create predictive models that take current conditions, and project forward to map to increasing volatility.

Aon has been tackling the issue head-on, providing organizations with better data, information and insights. For a firm that describes itself as being “in the business of better decisions,” this approach helps them provide their clients the clarity and confidence to do just that, and as a result helps them protect and grow their business.

One of Aon’s advantages in the marketplace is the ability to manage a vast amount of data and analytics to track overall progress and enable the firm to move more nimbly as risks and client needs shift. This is made possible through Aon Business Services (ABS). Its aim is internal and colleague-focused, as well as external and client-focused. ABS streamlines Aon’s in-house processes by making sure digitization and automation are widespread and well-executed, helping to diminish data silos and unify information across the business, so products and services can be scaled and hatched across the firm in new ways. For clients, ABS has fueled innovation by pioneering ways to cover risk via sophisticated data gathering that it then interprets with innovative uses of AI and modeling using machine learning. “These capabilities have enabled us to more effectively deliver our Aon United strategy and accelerate innovation on behalf of clients,” says Andersen. “With these foundational capabilities in place, we can deliver a differentiated client experience that results in Aon clients being better informed, better advised and able to make better decisions that protect and grow their business.”

One of the core values of ABS is its innovative approach that directly addresses and solves for new and emerging challenges facing the insurance industry. One big challenge: insurance risk can no longer always be assessed, as it has been in past decades and even centuries, primarily by studying historical precedent. In the case of climate change, most notably, there really is no historical precedent. Other issues also require new tools to measure value and assess risk, like the increasing prevalence of products defined by intangible assets such as intellectual property and brand value. (The shift towards intangibles has been almost as dramatic as the growth in the climate challenge. A full 90 percent of the value of Fortune 500 companies is now represented by IP and other non-physical assets, according to advisory services firm Ocean Tomo.)

To create models to assess these new risks, Aon continues to refine how it collects and manages data. Already, “we have built leading repositories of risk, health and wealth data,” says Andersen. “This is in addition to the insights that are collected from ​​placing $75 billion of bound premium annually in commercial risk, directing $180 billion of health care premium annually in health, placing $50 billion of bound premium annually in reinsurance, and holding $4.1 trillion in assets under advisement in wealth.”

In the case of climate change, the firm works with institutions like Columbia University to draw on its decades of climate research. Together, they are creating a climate change solution for Aon’s Impact Forecasting tropical cyclone catastrophe model suite. This enhancement will enable insurers to quantify climate risk in their portfolios and make adjustments that will inform better decisions on pricing, investments and exposure management both today and over the long term.

But data alone cannot solve the challenges faced by the industry. The next step is to then analyze and synthesize the data so that Aon colleagues can provide clients with enhanced insights to make better, more informed decisions around emerging, and more volatile risks. Again, Aon takes an ambitious approach. Andersen explains: “Our Impact Forecasting team has over 125 climate and catastrophe-focused probabilistic and scenario models, spanning 12 perils and almost 80 territories around the world, as these risks are vastly different based on geography. Insurers can also incorporate their own view of risk into model results.” Andersen notes that establishing trust with clients across all industries is important, so it’s also embedded in Aon’s work. “The models deliver transparency, so every step of the calculation process is clearly defined and can be easily explained to stakeholders, regulators and rating agencies.”

The agricultural industry, for example, benefits greatly from the Impact Forecasting team’s modeling capabilities because the technology allows them to better understand the impact of weather and climate-related events on their crops—which is increasingly important as those events become more volatile.

“They often face operational losses due to unreliable cash flows throughout the year based on seasonal crop yield, which could be impacted at any time by weather-related events or other variables,” says Andersen. “Combining reinsurance capability with data and analytics expertise led to the creation of an innovative, tailor-made crop risk management program that pays out automatically once a predetermined trigger is reached, without any claim activity.” He continues, “The outcome for clients is increased cash flow reliability, including an income buffer to protect against volatility of earnings, regardless of poor harvest seasons.”

Another tool is catastrophe bonds, which insure governments and organizations against climate disasters and are structured, in a manner related to the crop-yield tool, according to innovative “parametric” triggers that pay out when agreed-upon climate event characteristics occur.

Aon Architect is also a product that has powerful applications, especially in the wake of the COVID-19 pandemic, as employers are increasingly committed to building more resilient workforces, now and in the future. It’s a way to “architect” company health care benefit structures. “At a time when employers are increasingly focused on employee retention and the rising costs of benefits,” Andersen explains, “it’s a patented, data-driven solution that blends employer financials with employee perception, analyzing roughly 500,000 client-specific scenarios and allowing clients to create and modify their own scenarios.” He continues: “The tool measures employee perception using proprietary data and advanced statistics and uses machine learning to predict employee plan selection behavior to help balance financial objectives and employee satisfaction.”

Andersen notes that changes in types and degrees of risk are ever evolving and Aon, powered by ABS, will keep doing so as well. He’s optimistic about what it all means for continued innovation. “Data and emerging technologies are creating opportunities to accelerate innovation, increase efficiency and improve client experience. As we increase our relevance in the evolving landscape, we can help our clients address their most pressing challenges, especially at a time where heightened volatility impacts organizations globally.”

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