Reinsurers Fail to React to Secondary Peril Threat

Chris Westfall
Chris Westfall

Carriers and reinsurers need to refocus underwriting on so-called “secondary perils” or face a long term deterioration of their bottom line, according to a Swiss Re report released last week.

“We have raised this issue since we feel that the insurance industry might not be changing quickly enough to react to the challenges posed by secondary perils,” says Jens Mehlhorn, Ph.D., director and head of Swiss Re’s flood group.

Secondary perils are natural catastrophes that are sometimes associated — but not on the same scale as — large catastrophic events such as hurricanes and earthquakes.

The most common types of secondary perils include storm surges, river floods and hailstorms.

According to the Sigma report released by Swiss Re last week, secondary perils accounted for 30 percent of total insured natural catastrophe losses over the past three decades.

That is equal to an average of $6.5 billion per a year according to the report.

Despite the evidence, insurers and reinsurers continue to create a pricing model that focuses on large events without taking into account the billions in losses secondary perils.

“[On] the reinsurance side most of the secondary perils events do not have any impact on price levels despite the fact that large losses had been paid,” says Mehlhorn.

Mehlhorn adds that that about 10 percent to 15 percent of premiums collected by reinsurers to cover large catastrophic events are in fact used to subsidize losses from secondary perils.

Catastrophe models are also falling short on quantifying secondary perils because they focus is on primary perils — such as earthquake and hurricane — in developed countries with large insured populations.

“The current commercially available tools have little to offer when it comes to secondary perils, especially on global level,” the report says.

The Sigma report adds that climate change will only exacerbate the development of secondary perils as rising temperatures throughout the globe will lead to heavy rainfall and flooding events in continental Europe and tornados in North America that will create higher insured losses.

However, developing countries will likely be hardest hit since the lack access to traditional insurance products, Mehlhorn adds.

“Developing countries see a large proportion of victims and also high economic losses in terms of the country GDP,” he says. “Secondary perils impact developing economies more than industrialized economies.”