Global insured losses from natural catastrophe events in 2018 totalled $76 billion, with more than 60% of the losses coming from secondary perils, according to Swiss Re Institute’s latest sigma study.
In order to sustainably underwrite catastrophe business, insurers and reinsurers need to focus more on primary and secondary perils, warns Swiss Re, in light of an expectation of increased exposure to secondary perils driven by growing asset values in parts of the world exposed to more extreme weather events.
According to Swiss Re, independent secondary perils include events such as river floods, torrential rainfall, landslides, thunderstorms, wildfire and drought outbreaks, winter storms outside of Europe, and also snow and ice storms. Secondary perils’ also includes the secondary-effect of a primary peril, which includes things like hurricane-induced precipitation, storm surges, tsunamis, and also liquefaction and fire following an earthquake event.
Overall, economic losses from 2018 events hit $165 billion, with the insurance and reinsurance industry assuming $85 billion of the global loss. Of this, $76 billion were due to natural catastrophes.
Alone, the 2018 insured cat loss total is the fourth-highest on sigma records, and combined with 2017, insured losses from last year totalled a huge $219 billion, which Swiss Re says is the highest ever over a two-year period.
In both 2017 and 2018, more than half of losses were due to secondary perils, and Swiss Re says that losses from secondary events is likely to continue as a result of urbanisation, the growing concentration of assets in vulnerable regions, and also climate change.
In 2018, the single largest loss event was the Camp Fire in California. In recent years, wildfire losses have increased substantially, leading to industry discussion around the modelling and pricing of the risk, with some suggesting it should perhaps be classed as a peak peril.
Other significant secondary peril events in 2018 include a damaging hail storm that hit Sydney, Australia in December, and the secondary-effect flooding across parts of the U.S. as a result of hurricane Florence.
Edouard Schmid, Swiss Re’s Group Chief Underwriting Officer (CUO), said: “Large losses from secondary perils are occurring more regularly. 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 coast lines 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 chart below, provided by Swiss Re, shows the growing influence of secondary perils on annual insured catastrophe losses since 1970.
According to Swiss Re, the combined 2017 and 2018 natural catastrophe protection gap (disparity between economic and insured losses from nat cats) was $280 billion, with more than 50% being a result of secondary perils.
When compared with primary perils, secondary events can often be understated, but as shown by the huge losses in both 2017 and 2018, re/insurers need to take note of the rising impacts of secondary events and look to mitigate this moving forward to support global resilience, as well as the sustainability and profitability of underwriting cat business.
Commenting on the protection gap, Swiss Re’s Group Chief Economist, Jerome Jean Haegeli said: “The existing protection gap is an opportunity for insurers to strengthen global resilience.
“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.”