[00:00:00] Bridget Scanlon: Welcome to the Water Resources Podcast. I am Bridget Scanlon. In this podcast, we discuss water challenges with leading experts, including topics on extreme climate events, over exploitation, and potential solutions towards more sustainable management. I would like to welcome Megan Hart to the Water Resources Podcast.
Thank you so much, Megan, for joining me today. Thank you for having me. Megan is a Managing Director at Aon, which is a global services, a professional services company that deals with risk, which is going to be the focus of the podcast today. And you are currently Managing Director, but prior to this, you were Managing Director and Associate Director for Catastrophe Management.
Is that correct, Megan? Correct. Yes. Right. So insurance is a very broad topic, but today I hope we will cover Aon's role in the insurance industry, the findings from their 2022 Weather, Climate and Catastrophe Insights Report, definition of risk and the tools that they use to quantify risk, and then finally approaches to reducing risk and enhancing resilience.
So I know that's a lot to talk about, but we'll see how far we get Megan. So it took me a while. I'm originally Irish, so I, it took me a while to remember that Aon is number one in Irish because a h’aon, a dó, a trí that was 1, 2, 3. So Aon is one and reflects united oneness or united strategy in the company.
So Megan, maybe you can describe Aon's role in risk management and in the insurance business and your work there.
[00:01:53] Megan Hart: Perfect and thank you so much for having me today. So a little bit more about Aon. We are a professional services firm. We focus primarily on risk, on health, and on retirement and really working with our clients on holistic strategies around how they're managing these, these pieces of their business.
We are 50,000 plus colleagues around the world with a footprint in over 120 countries in terms of, it's a, it's a large firm. But where I sit is within our reinsurance solutions lines. So, so a little bit more about what reinsurance is for those that, that may not understand, the terminology is that our clients are insurance companies.
So insurance companies also have a need to transfer risk when the risk that they are holding from their portfolio becomes challenging to manage from things like natural catastrophes. So if we think about an insurance company, a house catches on fire. There's a car accident. Those are sort of easy incidences to, model, to understand there's tons of historical data. But where the insurance companies really struggle is when there's a major natural catastrophe that isn't affecting one house. It's affecting tens of thousands of locations within one event. And that abrogation of loss is really hard to manage and the volatility around it.
So where we come in is we transfer risk from the insurance company into the reinsurance market, as an additional form of sort of managing those large catastrophe risks. So reinsurance is called insurance of insurance companies and we really focus on the types of risks that are challenging for the insurance companies to manage.
And so, I sit in a the group that manages that transfer process. So we are a reinsurance broker and do not carry any risk. But we work with the insurance companies to understand the risks, and figure out, what types of risks they're comfortable with, what they're not comfortable with, and then kind of transferring that.
And that really focuses heavily on a strong foundation in analytics and understanding risk, frequency and severity of perils around the world.
[00:04:23] Bridget Scanlon: Right. And so I think what you're describing then, Megan, is low probability, high impact events like black swans that are difficult to predict and then also difficult for insurance firms to manage.
And so they want to transfer some of that risk then to reinsurance companies. So we've been hearing quite a bit in the news lately about insurance companies pulling out of different states, like State Farm and Allstate pulling out of California and Florida. And I read a piece by Melanie Gall in The Conversation where she cited a catastrophic experiences in some of those places at wildland- urban interfaces in California and home construction prices being very high in California, causing insurance companies to have issues in those states. Maybe you can describe a little bit about what's going on there And your thoughts on it.
[00:05:22] Megan Hart: Sure, yeah, but I, well, I can't comment about any specific company that you just mentioned, there are some general trends that we're observing in the industry that we can kind of comment on.
So when we think about property insurers. They have not experienced a highly profitable year since 2016. We started to see the market stabilize a bit in early 2022, but then we had increasing severity and frequency of weather-related perils again after that. With Hurricane Ian, and now we've had the worst first half of 2023 in terms of severe convective storm events that we've had in history.
And then we're also in an inflationary environment where we're struggling with proper replacement values. Like you're saying that the home values are going up and those may not be captured properly. So all of a sudden, the cost of replacing and repairing these structures is getting higher. And so those are leading to, some headwinds for the insurance companies in terms of making some progress here.
And so what we're observing in response there is that insurance companies are trying to figure out how to manage their risk, and it's not all about transferring it to re-insurers. There's a lot of opportunities that they they can explore in terms of creating their portfolio of risks, and so they're really looking deeply and trying to understand rising systemic risk, growing volatility and some of those issues that I just talked about in terms of valuations and inflation and things like that.
And there's a couple of things that we're seeing insurance companies do. They can raise their deductibles, right? They can require their homeowners or policyholders to carry more of that risk in that, the lower losses. They can decrease their limits, same sort of strategy, limiting their amount of loss there. And they can non renew existing contracts. If they really feel as if they can't figure out how to manage the risk in that area, or they're unable to charge a premium that would allow them to carry that risk in a profitable way. So you can tighten your underwriting guidelines and say, I'm not going to retract from that particular area, but I'm going to require that the structure was built out after a certain year or has certain characteristics that make it more resilient to, the key perils.
But if you are able to to sort of tackle it that way, get to raise your premiums high enough, then sometimes that's really your only near-term option. In terms of that retraction and non renewing contracts, but what I would say there is the challenge with the retraction from certain territories is happening in areas where the homeowners insurers are not able to raise their rates due to regulatory restrictions in those particular states that aren't allowing them to increase their premiums. And so it's sort of, in a way, kind of showing that, the regulators, we can't make money here. So, so you need to help us out, right? And do I think that that is going to continue happening and it's going to be a huge problem for, for decades to come? No, I think we're in a cycle where the market is in a state of learning and we're trying to, the market is trying to right itself. And as part of that process there are these sort of challenges and these dynamics that we're trying to manage. Right.
[00:09:08] Bridget Scanlon: And I think it's interesting because I mean, sometimes we feel like we should be able to live anywhere or we can engineer anything and, we may not have a good perception of risk.
And so I think insurance costs and things like that help us understand risks a little bit, like living in a flood prone area or whatever, these sorts of things. So I think that's important. I really enjoyed reading Aon's Weather, Climate and Catastrophe Insight Report for 2022. And the maps and the graphics and the data and the highlights were extremely informative.
So maybe I would like to mention a couple of the things that I noticed from that. So global natural disasters, 313 billion in 2022. And you mentioned in the report that that's close to the average for the 21st century. And that's, interesting because we think of everything being worse last year or, recently or whatever in the media. So it's interesting to see that it was close to the average.
And then half of the total losses in the U. S., which I guess insurance penetration and wealth and all of that sort of thing contribute to that. And of course, Hurricane Ian was a big contributor. The global maps, very interesting, showing critical issues in 2022, like Ian costing $95 billion, European droughts, $22 billion. US drought, 16 billion, on down. So these costs are very informative and so droughts and floods and in different regions throughout the world, are costing, have high economic impacts. And then you also mentioned in the report that economic impacts correlate with the concentration of wealth, but that you don't see the humanitarian impact.
And lastly, in the report, you mentioned that insurance covered 132 billion of the economic losses. And so that was 42 percent coverage. So we have about 60 percent protection gap, globally. And that 2022 was the fifth costliest year on record for insurance companies. So I know that's a lot of information that you guys provided, but maybe you can comment on some of these things, Megan, and your thoughts on them.
[00:11:35] Megan Hart: Yeah, absolutely. So I think you, you hit the nail on the head with what gets the attention in the media and how that sort of shapes how we view changing risk, there are the headlines always kind of make a big splash, but I think this report helps you to really put everything in perspective.
Against what we're observing and just the recognition that there is natural volatility and what we see around natural hazards that it isn't the same every single year. And that's the whole reason for the reinsurance industry is that we each year we're tackling different types of perils and their impacts and where they are affecting different parts of the world.
And that gets to the point of then that protection gap, there, there's a lot that the insurance industry can do to still reduce that protection gap. And that's really important because we know that the communities that are impacted by natural catastrophes, if they have high insurance penetration, they're more resilient. They build back more quickly, the communities are more supported and we really need to focus on solutions, outside of the areas where we have high insurance penetration. So if we think about North America, Europe, Japan, Australia, New Zealand, those areas we have good coverage.
We have good analytical tools to understand the risks there. Now the tools are not created equal globally. And so that protection gap is occurring often in places where we don't have tools that help us to understand it. That would make. insurance companies feel more comfortable going into those areas and offering solutions.
But I think we are creating more globally consistent tools to understand risk better and thinking through new risk transfer mechanisms. Like maybe the traditional insurance policy isn't going to work across the board, and you may need to explore different innovative solutions like parametric solutions that are focused on hazard triggers versus actual loss costs.
[00:13:47] Bridget Scanlon: Right. that's very interesting that you mentioned parametric insurance. That seems to be very valuable. I mean, in many aspects. So it's less costly because maybe you can, describe it a little bit more, Megan. It's not like your traditional insurance where you have to send out people to evaluate the losses and all of that sort of thing.
So you mentioned it just triggered by hazard and then you pay out and they have bought the insurance, and then you pay out without having to have somebody go out there to look at what happened and what the impacts were.
[00:14:21] Megan Hart: Sure. Yep. So parametric covers can often bring new sources of capital into the risk transfer industry. It's, it's not necessarily the same companies that would be supporting a reinsurance transaction, but you have the capital markets that will also support these types of covers And what they are is They are triggered. Now I'm talking about sort of this from the natural catastrophe perspective.
There are other types of parametric covers as well, but the idea is that it's not indemnity. So it's not based on an actual loss and going in with adjusters and understanding, the replacement costs and things like that. It is triggered by meeting a certain level of hazard. So if we think about a buoy off the coast of Texas, if you have storm surge that exceeds a certain amount, it could trigger that payout.
And you could have multiple triggers and you could have different levels of trigger. If it hits three feet, you get this payout. If it hits five feet, you get this payout and so on and so forth. And it is still heavily focused, at least in the natural catastrophe world, catastrophe models and how they understand tail risk.
And so, you could also have an earthquake trigger. So if you had a certain, at a certain seismograph, if you exceeded this hazard amount, then you get this payout. So we're seeing that as another interesting way to understand risk, especially as our needs across the globe change, often now we're starting to think about nature based insurance products for, a company that has a forest project that's helping them to, with their, their carbon goals, what if that forest burns down, so that it's, we're able to present new ways to manage risk with these new innovative tools.
[00:16:16] Bridget Scanlon: And do you see parametric insurance being deployed more in developing countries where you have low insurance penetration like Africa or China possibly?
[00:16:29] Megan Hart: Exactly. I think it, we put all the tools on the board when we're trying to figure out the right solution here. And it is always one of the tools in our toolkit and in areas where we can't find sort of a traditional solution, oftentimes, we look at that opportunity to see if we have enough data to support a parametric card.
[00:16:53] Bridget Scanlon: And, then another aspect of the report that you put out for 2022 was on the fatalities that resulted from natural disasters. And, I guess you mentioned that, in the report that there were 31, 000 fatalities in 2022. globally, but many other years there were much higher levels. So 255, 000 in 2010, so 2008, 245, 000.
So many other years were much higher than in 2022. And what I found very interesting was, 19, 000, approximately 19, 000 of the disasters of the 31 000 in 2022 were attributed to heat related fatalities in Europe. And then there were mortality related to Pakistan floods and Indian seasonal floods and things like that.
But the 19, 000, related to heat waves in Europe, that seemed really high.
[00:17:53] Megan Hart: Yeah, I think if we were to look at the number of fatalities by year, it's going to heavily depend on what types of the losses that year. So we know earthquakes, we're going to have a lot of fatalities in 2023, because of the earthquake in Turkey.
if there's massive floods, we tend to see more fatalities. And now we're seeing these droughts and these heat waves that are also driving a lot of the fatalities. And that's really shown us that we need to do better in terms of our peril coverage. So as an industry, we typically focus on what we call acute peril.
So the perils that lead to lots of physical damage, so hurricanes, floods, severe convective storms, wildfires, earthquakes, winter storms, and so on and so forth. But now there's a need to understand things like heat wave, excessive heat, extreme precipitation, freeze risk, some of these perils that may not lead directly to a lot of physical damage, but can definitely impact communities and insurance companies. And now more often we're talking to larger corporations as well in terms of understanding how these perils impact employee well being and business interruption and some of these other key items that create risk to their company that they haven't paid attention to maybe enough before, but that there is a need to, if you're going to build a data center in India. Where should you be putting it if you're thinking through how risk could be different in 30 years?
[00:19:36] Bridget Scanlon: Right. Very interesting that more emphasis then on what you might not have considered acute risks in the past and the heat waves. And then another aspect of the report that I thought was extremely interesting was that indicated that natural disasters have been decreasing globally this century.
And they attributed the reduction then to improving resilience, the warning systems. Disaster response and adaptation strategies and also read another report by National Geographic that indicated that weather disaster related fatalities are down. So, so that's interesting. That's some good news.
[00:20:18] Megan Hart: Good news. We need more good news. And I think what this tells us is we are learning. And that is really key to everything that we do. I always say, especially when we talk about some of the challenges within the current insurance market right now. Insurance has been around a really long time. And if we couldn't learn to innovate and to better understand the risk, then that wouldn't be the case.
And so I know where you're not necessarily talking about insurance specifically, but I think that the broader sort of conversation is around learning and we are doing that, we're sending a team to Maui in a couple of weeks to look at what happened with the wildfire in Lahaina to better understand where things went wrong and, what we can do better and, after every hurricane, we are sending a team out there to say this, this sort of roof covering performed well, this didn't, or, this particular structure had hurricane shutters and this one didn't.
Let's, let's look at their progression of damage and making sure that that carries forward in terms of, any new construction, or if you are going to do a retrofit, how do we make sure that that education carries through to policyholders in terms of what they can, they can do to reduce their risk.
[00:21:38] Bridget Scanlon: Right. And you mentioned a lot of the hazards that you focus on, that AON focuses on, which is tropical storms, floods, storm surge, severe convective storms, winter storms, wildfires, earthquakes, and a variety of natural catastrophes. It's interesting that we're seeing compound events more now too.
And so trying to understand the linkages among those and then to see if the compounding amplifies the effect or the impact and all of that sort of thing. So droughts and heat waves and many other aspects. And then you also work quite closely with different academic groups to address some of these. So the catastrophe modeling that you use is different for each type of hazard and in various regions. Maybe you can describe that a little bit, Megan.
[00:22:31] Megan Hart: Yes, absolutely. And I think there's been a recognition, over the last couple of years in particular, that this, the idea of these compounding events. These cascading events are something that we really can't ignore.
And that's not even just considering different types of natural catastrophes and how they are related, but also how supply chain risk factors into this, how there might be overlaps with liability or casualty covers and property risk. There is interconnectedness that we maybe didn't recognize or appreciate.
Okay. Prior to the last few years and our learnings there and so when we've developed catastrophe models in the past, we've typically developed them peril by peril and not considering how they could be correlated across the globe. So, a hurricane in this basin, a hurricane in that basin or flooding or drought and how those could be related.
We're realizing that it's a bit of a miss there. And so we need to do better in terms of understanding the global teleconnections and, the relationships across perils and regions. It's not an easy fix, right? Because we've had the same framework for generally, for this last 30 years. And so we've kind of got to rethink how we consider risk, better in the future. And I think the other thing I'll mention, I, I'm part of our climate risk advisory team at Aon And so, we've traditionally focused on near term risk for insurance companies, but that is also, becoming obvious that, that we need to do better and we need a more forward looking view to be more strategic.
And so that's also requiring new tools, consideration of new perils and consideration of how everything is sort of interconnected as we move forward.
[00:24:18] Bridget Scanlon: Right, and I think for 2022, we could see this El Niño climate teleconnections resulted, or La Niña, I should have said, resulted in flooding in Australia and droughts in other regions.
And so this improved understanding then could help us better manage these risks and prepare for them with more knowledge. And you, you work with different academic groups on different hazards like, Columbia on the tropical cyclones and Illinois on severe convective storms. And you see San Diego on wildfires.
And so I think that's really helpful to you. Is it getting that academic input.
[00:24:58] Megan Hart: Exactly. So, some of our key partnerships are, as you mentioned, Columbia University on understanding global tropical cyclone risk. And then we work with Central Michigan University and University of Illinois Urbana Champaign on severe convective storm.
And then we work with UCLA and UC Merced on wildfire. And really we've, we've invested, and that's in the U. S. We have other global partnerships as well, but kind of focusing here. We've recognized the importance of these partnerships with these academic institutions from a couple of perspectives. One, we want to understand what's going on in research before it makes the New York Times headline.
We need to know, kind of, it's rapidly evolving and we want to see it at the table to understand who's talking about what, what is the general scientific confidence, where are the researchers in agreement, where are they in disagreement, and then connecting that to the impacts that it can have on our clients.
And so I, I think it's mutually beneficial for a couple of reasons. We get the information quickly. We can also sort of work with our researchers to say, this is the question we're trying to answer. Can you help focus what you're doing to help us answer this question? And then I think at the same time, we are helping to focus that research on something that's going to be really impactful.
So there's tons of great papers that, you know, publications that come up, there's tons of data that comes up. But oftentimes, we're missing that last piece of the puzzle in terms of, well, what does this mean? And how do we use this information? So to the extent that we can get together at a table and say, I love what you're doing. And this is great. Please help me find a way to bring this to our clients in a way that makes sense to them and can help them make better decisions in, and understanding that this is all, evolving and there's a lot of uncertainty. And so how do we accurately describe their our state of understanding of these key perils.
[00:26:54] Bridget Scanlon: I really appreciate that integration with academia because as academics, we oftentimes go off on left field and you're boots on the ground where you have to deal with real issues and address real concerns. And then, so the interaction then helps to focus the research and address the questions and give you those tools then that you can more readily use.
I mean, sometimes people tell me, Oh, well, we should be prepared for one in a thousand year drought, or, we have paleo records that indicate this. And I always come back and just say, well, how much insurance do you want to buy? I mean, that's the bottom line in many of these issues. One of the things that people may not be aware of, we talked about the insurance gap globally, but also homeowners, not aware that their homeowner insurance does not cover floods, and that's a big issue in the US. Maybe you can talk a little bit about that and flood emergency management and how that is linked, what's happening in that area.
[00:27:55] Megan Hart: Yes, absolutely. And I think, flood is a challenge, particularly here in the U. S. for a few reasons. So, historically insurance companies were not covering flood because it was too challenging of a peril to figure out how to adequately charge for the risk. There weren't flood catastrophe models until more recently. And so that was a challenge that the traditional insurance companies were not willing to take on.
And so in response to that came the National Flood Insurance Program under FEMA. So they developed that program to allow access to flood insurance, but it is not required. So the only time that it is required to have an NFIP policy is if you have a federally backed mortgage. and you're in a high risk flood zone.
So in a 100 year flood plain as defined by FEMA. And so those people know that they need to have flood insurance, but many other people do not. And those flood plains are really focused on riverine areas. So anybody who's in areas that are driven by flash flooding, they likely do not have flood insurance and may not know they don't have flood insurance.
And that's the really scary and sad part. I went down to Mexico Beach after Hurricane Michael made landfall and there were locations that had eight ft or more of storm surge. And no flood insurance and the people that lived there had no idea that they didn't have flood insurance and their homes are gone.
And it's really, it's very sad. And they, you look at these flood zones and you say, well, I'm outside the flood zone, so there's no risk. And really, there's a lack of understanding about, about how these flood zones are determined, how old they are, there's. You're kind of in versus out versus understanding a gradient of risk.
There's a lot of location sensitivity when it comes to flood. And so it's really challenging to educate communities about their flood risk. And I don't think insurance agents are always telling their policyholders or their clients to say. hey, this doesn't include flood insurance because oftentimes they don't know how to access the flood insurance to help them.
And so there's just, it's a huge educational challenge and that, over and above that, we're seeing some challenges with the National Flood Insurance Program. So we're seeing a revamp in how they are charging in terms of their premiums. So they're trying to further differentiate. Before it was sort of, as I mentioned, in a flood zone, here's what you pay out of a flood zone.
Here's what you pay. It's overly simplistic, but generally, and they are trying to take into account, areas where you are higher risk versus lower risk and adjusting those premiums, but it's leading to large increases in premiums for a lot of the homeowners in those areas and In some cases, it's, hundreds of percent higher, and so then it's what if you can't afford it, what do you do at that point?
and so it's, it's good to have risk adjusted premiums, but it's hard to explain it, and it's, it's hard to get everybody to sort of buy into it and and move forward,
[00:31:20] Bridget Scanlon: right? I mean, I work on water resources and in Texas water resources. We always emphasize droughts, the drought of the 1950s and all of that sort of thing, affecting water availability. But more recently since Hurricane Harvey and, other big floods, they have moved to considering making a big state effort on understanding flooding and storm surge and compound flooding. And I know you work with Notre Dame on storm surge and the ADCIRC modeling, with people from University of Texas also.
So I think that's a really important, we're moving more in that direction to address that and improve our understanding elevation models and all of this other data that goes into it. Another aspect,I would like to talk about is the tools that you use. I mean, you have observational data, you have the catastrophe modeling, then future climate models, and real time event monitoring.
So a lot of different types of data. Maybe you can describe some of those tools a little bit, Megan.
[00:32:26] Megan Hart: Sure. Yep. We have a pretty vast toolkit to allow us to connect the right tools to our clients to address whatever they are, they need to do. And that is, has traditionally been our insurance company clients, but now it's much broader in terms of, working with financial institutions to understand the potential for mortgage defaults or working with private equity firms on understanding the risk of a potential acquisition.
And so, this toolkit is, as you mentioned, quite broad. But I would say the foundation is the catastrophe model. And so I'll talk a little bit real quick about catastrophe modeling and that as the firm foundation. So basically catastrophe models were developed late 80s, early 90s and recognition that we didn't have a good understanding of those high severity, low frequency events, and there was a need to better understand, the types of events that we could see in the future, even if we haven't seen them. So I'll use North Atlantic hurricane as a quick example. Let's say we've got really good data back to 1900 and we see about, let's say two landfalls a year.
So now we've got 120 years of good data, two landfalls. We've got 240 data points. Is that really enough to truly understand what we could see in the future? No. So what catastrophe models do is they fill in the gaps of our historical catalog, including extrapolating out from our observations. To capture tens of thousands of plausible events and what the impacts could be.
So now, could you have a cat 5 hit New York City? Possibly. It's going to be really low frequency, but it's captured, in some of the models. And, events with different characteristics. We're never going to see Hurricane Andrew again, exactly. But could we see something slightly similar? Yes.
So that's why we're capturing all these iterations. We're learning from the historical data, but we're filling it in so what the models then do is they start with the general event characteristics. Then you create a footprint of that event. So typically at a pretty high resolution and some flood models are down to 10 meters. You're capturing flood depths. For wind, it might be 250 meters and you're capturing the 3 second peak wind gust, or the peak, peak spectral acceleration for earthquake, whatever it might be. Now you have the grid and you have your hazard. You overlay your exposure on top of it. So if I'm an insurance company, I would say for this particular event, let's look at everything in my portfolio that falls into that particular footprint.
And then you have to understand the details about the structures in your footprint. So what year was it built? What number of stories is it? What's it made out of? How much does it work? And then you get to add that vulnerability. So based on that hazard for that particular event and the characteristics of the structure, you're computing a damage to that structure.
So you might have 30 percent damage which you apply to the value of the structure. Let's say it's a million dollars. You got 300, 000 in damage and you have damage curves or vulnerability functions for the structure for the content for potential business interruption or the cost of moving out of your home into a hotel.
There's all those considerations. And then understanding who is responsible for covering that loss. So how much of it is under the deductible or over your limit, and then you aggregate it. So the key for the insurance companies is understanding how many of the structures or the risks in their portfolio could be impacted in the same footprint.
And how does that sum up to understand what their tail loss is? Could ultimately look like so. So basically, we think about this as a risk triangle. So where are you? Where is your exposure? What's the potential hazard look like that overlays those individual events and what is the vulnerability to your structure?
And once you understand those 3 pieces, you can understand the risk. And figure out, who's owning the risk and what you might need to do should you need to come up with alternative methods for managing that.
[00:36:48] Bridget Scanlon: So, that's nice that you described the risk triangle, the hazard, the exposure and the vulnerability and how they come together.
How do you see the trends in risk? We're seeing increased risk. Is it because of increased hazards or more exposure or more vulnerability?
[00:37:10] Megan Hart: You see those trends as a really challenging question? And if I had the answer to it, I'd be a billionaire. But, it is. It's a challenging question because I think there's a desire for everyone to have an answer to this.
That is simple and the reality is, is that it is not simple because there's a lot of different factors at play in terms of understanding the loss trends. We've been observing. So we do have exposure changes. And so we have people moving into the high risk areas, building more and more expensive structures in those areas.
And then we have inflation And, the increasing values of the structures. So that is a huge factor in terms of what we're observing in terms of the loss increases. So we have more structures in the coastal areas, more structures in the wildland urban interface that are at risk of wildfire damage, and we have larger urban centers, even in the center of the U.S.
So if a hurricane comes through, or a tornado, or a hailstorm, you can get more exposure into those footprints without even changing the house. So that's one piece of it. But we're also seeing a lot of volatility in terms of the frequency and severity and the general types of events that that we're seeing also affect our insurance companies portfolios, and so taking that into account as well.
We are seeing more unique events. We are seeing, some changes in frequency, precipitation events, we're seeing those happen more often. and then, we're going to be starting to see higher spots just because of sea level rise. We don't even have to change necessarily the hurricane frequency or severity.
We're going to see more issues with coastal flooding in that respect. So, again, kind of just saying, it's... exposure plays a huge role. Hazard is changing and we're trying to understand what the trends are there and and plan for it. And then we also need to consider vulnerability as well.
As you mentioned, we talked about earlier, we think it's getting better, right? But we have to wait for an event to happen to know if we're actually doing that. We haven't had an earthquake, a major earthquake hitting California in California for decades, we think we're doing great, but we haven't been challenged yet.
[00:39:35] Bridget Scanlon: So, I mean, some of the things that you mentioned, I think, for example, in Texas, they're building levees and stuff because of flooding, but then they talk about the levee effect. So then there's more development, because the people feel more secure. And so I think, the insurance industry could control where development is by having higher premiums and maybe they would become aware, but maybe those people are so wealthy, they don't even consider those things, but in part you may dictate to some extent, where development occurs, because I had some colleagues in San Diego and said they couldn't get insurance for a property that they had inin a forested area and stuff. So I think that may help, maybe a little bit self regulating. But considering human behavior and, considering infrastructure and risk perception, it's difficult to put all of those things together.
[00:40:31] Megan Hart: That's where also there's the opportunity to work with local and state governments in terms of helping them understand the risk or opportunities to reduce the risk, a particular municipality came to us and said, we've got 5 million to spend, here on, on reducing coastal flood risk.
What, what do we do with it? That's an area where they're looking for education and advisory services. That's something that we are happy to do to make sure that you are getting the biggest thing for your buck, right? And that you're also making sure that they have their eyes wide open in terms of what their, their risk truly is.
We're, I feel like as human beings, sometimes our memory is, is short, right? If something hasn't happened recently, we're certainly not thinking about it as top of mind, right? But to the extent we can, provide them with, with data, with realistic scenarios and have that conversation, and especially if you can put dollars and cents next to it, that's the other key is people pay attention when there's dollars and cents next to it.
What would you say? There's gonna be a 200 year, 250 year storm surge that could occur and this could happen and that could happen. It gets really abstract. So the, to the extent you can boil it down to, and here's what the economic impacts are gonna be to the community, that's gonna be really helpful.
[00:41:53] Bridget Scanlon: Right. I think our memory is getting shorter and shorter all the time. If it didn't happen last week, we don't, we don't even consider it. Another aspect of the catastrophic modeling approach is that,the data availability and open access data and this OASIS loss modeling framework. I think that's really nice. Maybe you can describe that a little bit, Megan.
[00:42:15] Megan Hart: Sure. Aon is a supporter of the OASIS loss modeling framework. And really the idea is that making some of these tools more available, across the board is going to be valuable in advancing our industry and advancing our knowledge of risk. And so, the idea that we can create a more standard framework and approach that allows for this access is ultimately beneficial across the board.
We've got lots of different tools. that have different outputs. And so if you are able to get more data at your fingertips to make better decisions, then, that is where we're going to start seeing rapid increases in how we are innovating in our industry. So, catastrophe modeling, we have, a handful of global solutions, and then a lot of more regional solutions.
And oftentimes you see that the two main vendors that are really just kind of popping out to the extent we can get some of these other tools into the hands of users to help enhance their understanding. that's just gonna give us. more, a better foundation in terms of understanding risk and being able to communicate that.
[00:43:33] Bridget Scanlon: Right. And improving our understanding of risk is extremely important if we want to develop solutions. And you have mentioned some solutions in increasing resilience And maybe you can describe a little bit more about those. I mean, some maybe more short term coping strategies and long term adaptation.
I mean, when I talk to people in Australia, New Zealand and other places, they talk about buying back homes in flood prone areas and things like that. So they have different programs and I'm sure they have those in the U. S. also. So maybe you can talk about how people can try to reduce their risk.
[00:44:09] Megan Hart: So we tend to, we're the cat modeling community tends to look at portfolios of risks to identify key assets where maybe you want to focus your attention. So if if you have 50, 000 risks in your portfolio, what are the top 100? What's driving those risks? And then the next question is often, well, what do we do about that? and especially, in if you have a Corporate location, and so if you're a major bank or financial institution and you can't just non renew a policy because that's your corporate location, you're often asking what, what can I do to reduce the risk? And we have a property risk consulting team here at Aon that will go look at these locations asset by asset and provide recommendations on how to reduce the risk. So can you put in a local levee system to reduce flood risk? can you clear out some of the the foliage close to the building to reduce wildfire risk? So what are the key things that that you can do to sort of manage that? And if you're building a new structure, don't build it thinking about your risk today. Think about what the risk is going to look like in 30 years. And so that's the other question we're getting. I'm going to build a structure and I want it to last the next 50 years. Can I build it exactly to code? Or should I be considering that extreme rainfall could increase by 15 percent in the next 30 years?
And should I be doing a better, putting on a more robust roof? And so kind of having that forward looking view is going to be also really important. For anyone that's interested in understanding how to reduce risk. I would encourage them to go look up the Insurance Institute of Business and Home Safety, the IBHS. It's a non profit funded by the insurance industry, and they do a lot of full scale testing of structures to really understand how to reduce risk from wind, hail, wildfire, and rainfall. So, looking at making sure that you're not getting flooding from rain, things like that. And so they do a great job of testing new materials that come up, testing siding, looking at different strategies.
They do it for residential and commercial structures, and they come out with a very pointed list of. If you want to have a fortified house, if you want to build code plus, here's the exact things that you should do. And if you need, if you want to assess your own structure for how resilient it is. Look at these key things because these are gonna make the biggest difference to you.
[00:46:49] Bridget Scanlon: Right? I just visited a friend in California, in LA and she, they just redid their house and stuff, and so a lot of earthquake, brought in a lot of earthquake measures to reduce their risk to earthquakes. So, I think it's very important. And then when you consider the potential future risk, then that gets into climate change modeling and all of those sorts of things. Well, you've covered a lot of issues today, Megan, and I just wonder if you can summarize maybe your overall view on the future and how you see aON and your group contributing or helping the situation.
[00:47:26] Megan Hart: Yeah, perfect. I would just say that in one word, what I would like to focus on is innovation. and maybe education as a second word.
So I, I really think there's so much going on in terms of academic research. And it's rapidly evolving and we need to get the insurance companies and are the insurance industry more broadly comfortable with innovation and that's really going to accelerate what we're able to do across the board.
And so new types of tools, these climate climate models that the climate service providers that are creating solution globally to understand future focused risk. And that's a piece of this story. Innovation around around renewables, And creating better solutions there.
There is so much that we can do And I think we just need to continue to educate and innovate And share, in order to really get there. I, the other thing I will point everyone to, 'cause I think it was really a, a great, it was a great thing that we, we did as an industry is. There was an open IDEO innovation challenge that was supported in part by the insurance industry.
So CSAA and AON sort of led this challenge and pooled money and then asked for, basically entrepreneurs, insurance techs, researchers to come with solutions around managing climate risk. And we had hundreds different ideas that came through and it was an open challenge. Then we saw different teams start to mold together and come up with new ideas and it really focused on really early stage to late stage.
Innovation ideas. And it was, it really gave me a lot of optimism about what we have going on here. we see a lot of bad news out there, but then you talk to these groups and you hear how they're thinking about reducing wildfire risk or how they're thinking about supporting communities, especially, frontline communities that maybe don't have the same support that wealthy communities have.
forefront what we're doing in this space. And I think that is a good example of what I mean in terms of innovation and education.
[00:49:52] Bridget Scanlon: So I think we're dealing with a lot of challenges, but we're also improving our tools and improving data access.
And then with a better understanding of the risks, then we can better manage those risks. So no shortage of challenges, but it sounds like you feel like we are improving with all of the new data and satellites and modeling and all sorts of things too. And I like that you guys are integrated with the academic community also because that two way interaction I think helps improve the understanding and the applications.
I really appreciate your taking the time to talk with me today and to explain some of these issues, kind of complex for some of us to understand if we're not dealing with it day to day, but really helps us to understand what's happening and trends and stuff like that. And I really appreciate the report that you guys put out every year because that provides long term context.
We sometimes get carried away with what happened last week, but the longer term context and the numbers are very helpful. So thank you so much, Megan.
[00:50:54] Megan Hart: Oh, my pleasure. Thank you very much for having me.
