Analysts at AM Best have warned that insurers and reinsurers with exposure to secondary perils will face heightened enterprise risk managements concerns and impacts to bottom-line profitability.
In a new report, the rating agency notes that secondary peril events are becoming more impactful and generating an increasingly large amount of insured losses.
In fact, perils such as wildfires, tornadoes and severe thunderstorms are now accounting for a larger share of the losses from catastrophe events than primary perils such as hurricanes.
This is affecting the bottom lines of personal and commercial lines property underwriters, according to AM Best, with businesses in the US facing the brunt of the challenge.
Although the trends of more frequent and harmful catastrophes are a global issue, the US continues to suffer many of the most intense and most impactful natural disasters in terms of total damages and insured losses.
Additionally, AM Best notes that demographic shifts and population growth in coastal or other areas that have proven to be catastrophe-prone have elevated the magnitude of economic and insured losses.
Over time, analysts believe that these factors may have had an equal impact on loss totals than the more prominently mentioned climate changes and risks.
“As we have seen with population growth in wildfire-exposed areas in California and other western states – including the recent fires in Colorado –higher economic and insured losses are occurring despite natural catastrophes of lesser intensity,” said David Blades, associate director, industry research and analytics, AM Best.
According to AM Best’s commentary, early estimates of 2021 losses from natural catastrophes are higher than $105 billion, which would make it the fourth-highest annual total since 1970.
“The fact remains that secondary perils have not been modeled to the same extent as primary perils, although this modeling is evolving, and insurers are taking actions to address exposures to these risks through underwriting and pricing actions,” said John Andre, managing director, AM Best.
In the near term, the rating agency believes that insurers could see higher insured losses from inflation that increases the value of exposed property, as well as continued demographic shifts to higher-risk geographies and aging building stock.
It says the impact of these trends also is reflected in reinsurance pricing on primary companies, especially in loss-affected areas.
