Among the many painful lessons from a year of COVID-19 and lockdowns is that we live in a volatile world. What we thought was “normal” is far more fragile than anyone ever imagined. Business leaders have gone through the shock of a lifetime; as many as 100,000 businesses have permanently shut their doors since COVID-19 hit U.S. soil. And the ones lucky enough to have stayed in business now realize that the risks they face are more numerous, varied, unexpected and perilous than almost anyone had understood. What we’re least prepared for can cause the most damage, even if leaders feel like they “know” the risk; businesses of all kinds have been forced to reassess how they think about, and plan around, risk.
For many professional services firms, a global crisis like the COVID-19 pandemic provides a kind of “stress test.” That’s particularly true for those specializing in managing risk. After all, assessing and pricing risk is at the very heart of what drives these organizations. Firms are determined to help their clients prepare for whatever risks may loom. And as the world faces risks that are more “long-tail” in nature, the opportunity for the industry is greater. To respond to these increasing demands, their pace of innovation must accelerate.
Greg Case, CEO of Aon, a leading global professional services company, says this “risk revolution” is a unique new challenge: “When was the last time in global economic history that every single company in the world—big, medium and small—stood up and addressed a single risk at the same time in a way they never had before? The short answer: never.” Not only that, but new macro risks, many of them unprecedented, were already challenging the public and private sectors even before the coronavirus reared its lethal head. Several major developments fundamentally threaten the normal course of future business. Long-tail risks include those from a warming planet, rapidly-changing new work structures, potential disruptions to ever-more-integrated global supply chains, and even the growing threat that societal inequality poses to business stability.
Innovation within Aon’s business is increasingly critical to helping clients adapt. In recent years, Aon has built new capacities for innovation—including its New Ventures Group (NVG) – a unique incubator within the firm that is developing forward-looking lines of business and solutions focusing on many new areas including digital solutions, as well as new ways to access capital. Aon’s Case noted, however, that the innovation gap is not closing fast enough. That is the driving force behind Aon’s pending combination with Willis Towers Watson. In a more volatile and interdependent world where data is everywhere, better analytical capabilities combined with world class talent becomes indispensable. When these firms eventually combine, the “new Aon” will be even better at analyzing, managing, and using analytics to help clients reduce and manage risk and in the end make better decisions.
“Innovation” and “professional services” are not always phrases that end up in the same sentence. As an example, insurance is one of the oldest service businesses in economic history; its core concept has been so successful that it has not found a great need to change over centuries. The result: risk insurance as a percentage of GDP continues to decline. The industry’s relevance to the real challenges faced by businesses continues to wane even as the world becomes a riskier place. In fact, Aon’s research shows that five of the top 10 risks facing organizations are either uninsured or underinsured.
The pressure to innovate and develop new solutions is coming from both external and internal forces. Externally, the COVID-19 pandemic is the most recent and obvious example, but the impact of climate change has been felt by all of us for several years in the form of harsher hurricanes and superstorms, among other disasters. One industry innovation in this area has been catastrophe bonds, which create greater access to capital and enable insurers to offer broader coverage to clients. Such bonds lessen the financial impact on insurers in the event of certain types of disasters. They became increasingly popular after Hurricane Andrew hit in 1992, because they are structured to eliminate counterparty risk.
The push to innovate has also come from within the industry itself. A major new force is the “insurtech” sector — which marries core functions of the insurance industry with the speed and ubiquity of digital platforms, is transforming the experience for millions of consumers. Insurtech’s innovations have led to tens of millions of customers managing risks like auto accidents and home incidents in ways fundamentally different–and easier– than just a few years ago. In the U.S., insurtech startups such as Lemonade and Root have attracted huge interest from customers and investors in a short period of time. And Aon’s own recent acquisition of CoverWallet has accelerated its move into insurtech, expanding its ability to reach new segments of the market.
As Case says: “2020 will remain a clear historical reminder of the importance of ensuring that an organization is prepared for all of its extreme risk scenarios. Research, experience, and our client engagement efforts make it clear that organizations need to reimagine their risk landscape, how it is rapidly changing and how to address these scenarios going forward.”
The need to innovate is growing more urgent. And the response is emerging in some very unexpected places. Aon has learned that innovation can come from all parts of a firm, not just the places that have formally been instructed to focus on it. The company is increasingly encouraging all its employees to contribute ideas and consider themselves fulltime innovators. Its Intellectual Property Solutions group, for example, was recently lauded by leading IP industry publication IAM for launching a “potentially game changing IP finance initiative” with its first $100 million deal. And Case says Aon is just starting to scratch the surface.
Innovation is generally thought of as something that happens in the Silicon Valleys and Alleys of the world. But those kinds of companies are not addressing all of the challenges our highly volatile world faces. With new kinds of risks proliferating at a rapid pace, innovation must come from finance, insurance and professional services in order to tackle pressing issues like pandemic, climate change and the health-wealth gap, because huge amounts of capital and even our very society are at stake. The firms that will emerge to address those risks will look very different from the ones we’ve been used to up until now.