The Impact of Climate Risk on Mergers and Acquisitions in Insurance
Climate risk has transitioned from a minor consideration to a significant factor in mergers and acquisitions. Buyers now scrutinize a target’s vulnerability to floods, wildfires, and storms, assessing whether these risks are sufficiently insured and mitigated, and consider the possibility of acquiring assets that could become uninsurable over time.
Luise O'Gorman, global head of ESG transaction advisory services at Aon’s M&A and Transaction Solutions team, highlighted that climate risk is evaluated with the same attention as other key transaction risks. This evaluation often occurs through dedicated workstreams, rather than being a mere part of broader ESG reviews.
This shift aligns with the increasing weather-related financial impacts in the United States. The NOAA reports 27 significant climate disasters in 2024, costing $182.7 billion, a notable increase from the annual average of nine events between 1980 and 2024, rising to an average of 23 events annually between 2020 and 2024.
For insurance brokers, this presents a new area for strategic advice. The focus on climate risk parallels the concern over the insurability of an acquisition target. O’Gorman stated that recognizing climate risk as a financial risk is growing, with insurers, lenders, and regulators demanding evidence that these risks are addressed, ensuring businesses' resilience.
In practice, this involves identifying the physical threats a target might face and evaluating the adequacy of resilience measures and insurance coverage. Understanding risks like floods, storms, and wildfires, and their impacts on assets and business continuity, is crucial.
Expanding Due Diligence and Advisory Roles
The trend is for due diligence to extend to chronic risks like heat, drought, and precipitation variability. Buyers aim to quantify such risks to understand their financial consequences better. O’Gorman noted that well-modeled risk assessments facilitate smoother insurer discussions. Despite 67% of firms including climate risk in initial due diligence, only 13% maintain this focus throughout the investment, posing opportunities for brokers.
Brokers can fill this gap by providing ongoing monitoring and advisory services throughout the investment cycle. O’Gorman also suggests investors consider climate risks beyond the immediate horizon, with strategies extending to 2040 or 2050, turning climate risk advisory into long-term engagements.
The demand for reliable climate data is crucial, as NOAA’s billion-dollar disaster database will discontinue in 2025, shifting reliance to private data sources like Climate Central. With estimated 2025 losses reaching $115 billion, brokers will increasingly depend on advanced catastrophe modeling to guide clients.
O’Gorman explained that utilizing natural catastrophe models alongside climate models provides clients comprehensive insights into current and future exposures. The expectation is for more rigorous quantification and actionable guidance for risk resilience and insurance strategies.
As climate risks become central to valuations and insurability, brokers have an opportunity to evolve from transaction facilitators to long-term advisors in risk management and resilience planning.