Management Consulting

Retailers face significant challenges from external risks that can adversely affect their sales, such as extreme weather events and terrorist incidents. For instance, unseasonably mild weather led to an 8% decline in sales for John Lewis, while H&M reported a slump in profits due to cold weather impacting their spring clothing range. Additionally, events like the Salisbury nerve agent attack resulted in footfall reductions of up to 80% for some businesses. These unpredictable factors create volatility in earnings, prompting retailers to seek innovative solutions to mitigate financial losses. To address these niche issues, Aon introduced parametric insurance solutions tailored for retailers. This type of insurance provides coverage for financial losses related to external events that traditional insurance does not cover, known as non-damage business interruption (NDBI). By utilizing advanced data science, Aon developed parametric insurance products that pay out based on predetermined trigger points, such as specific weather conditions or significant drops in foot traffic. This approach allows retailers to insure against the financial impact of both adverse and favorable weather conditions, as well as other disruptive events. The implementation of parametric insurance has yielded quantifiable benefits for retailers. By transferring risk to an insurer's balance sheet, retailers can smooth their income and protect against unforeseen losses without the lengthy claims processes typical of traditional indemnity insurance. Claims are paid quickly once the conditions of the policy are met, providing retailers with greater certainty in managing their earnings volatility. As the retail landscape evolves, the flexibility and competitive pricing of parametric insurance are expected to make it an essential component of risk management strategies for retailers, helping them navigate the complexities of modern business risks.