Swiss Re has noted a trend of growing devastation wreaked by ‘secondary’ perils following a primary peril like a natcat. More than 60% of the losses following natcats in 2018 resulted from these secondary perils. Secondary perils are either independent, high-frequency low-to-medium severity loss events (like floods, torrential rainfall, landslides, thunderstorms, snow and ice storms, drought and wildfire outbreaks) or events that occur as secondary effects of primary perils (like a tsunami following an earthquake).
Significant secondary peril events last year included a hail storm in Sydney in December and secondary-effect flooding across the Carolinas in the US after Hurricane Florence.
The latest sigma report from the Swiss Re Institute shows that insured losses from natcats in 2018 amounted to $76 billion, the fourth highest one-year total. Insured losses from natcats in 2017 and 2018 together were $219 billion, the highest ever for a two-year period. In 2017, when aggregate natural disaster insurance claims were the highest ever in a single year, more than half were due to secondary perils.
The insurance industry covered $85 billion of global economic losses in 2018, the fourth highest one-year aggregate industry payout ever, and above the previous 10-year annual average of $71 billion. Of last year’s insured losses, $76 billion were due to natcats, also the fourth highest on record.
According to Swiss Re, the risks posed by secondary perils tend to be underestimated because their impact is masked by the losses inflicted by primary events, as was the case in 2017 with Hurricanes Harvey, Irma and Maria. However, their growing loss potential is becoming more apparent.
“Large losses from secondary perils are occurring more regularly,” says Edouard Schmid, Swiss Re’s Group Chief Underwriting Officer. “This is a trend the insurance industry must act on so that we can continue to underwrite catastrophe business sustainably. Secondary peril-losses will accelerate due to ongoing urbanisation, also in areas exposed to flooding such as along coastlines and in river plains, development in areas vulnerable to fire risk like wildland-urban interface, and also because of long-term climate change projections.”
The combined global natural catastrophe protection gap of 2017 and 2018 was $280 billion, and more than half of that resulted from secondary perils.
“Underwriting catastrophe business profitably means looking at peak and also forward-looking trends on secondary perils. By leveraging latest technology, insurers can focus more on developing appropriately regionalised models to assess the risk posed by secondary perils and develop a greater product range and targeted distribution for catastrophe covers,” says JérômeJean Haegeli, Swiss Re’s Group Chief Economist.