Secondary perils will be responsible for more and more catastrophe devastation in the future, according to a report by the Swiss Re Institute.
Global insured losses from natural catastrophes hit $76 billion in 2018, the fourth-highest amount on record. More than 60% of those losses resulted from so-called “secondary perils” – small or mid-sized events or secondary effects of a primary peril (for instance, a storm surge as a result of a hurricane or a tsunami following an earthquake).
The risks posed by secondary perils are often underestimated, because their impact is masked by the losses inflicted by primary events, the report said. However, losses from secondary perils are growing.
“Large losses from secondary perils are occurring more regularly,” said Edouard Schmid, group chief underwriting officer for Swiss Re. “This is a trend the insurance industry must act on so that we can continue to underwrite catastrophe business sustainably.”
Swiss Re Institute expects losses from secondary perils to rise due to growing assets in areas more exposed to extreme weather conditions.
“Secondary peril losses will accelerate due to ongoing urbanization, also in areas exposed to flooding, such as along coastlines and river plains, development in areas vulnerable to fire risk like wildland-urban interface, and also because of long-term climate-change projections,” Schmid said.
According to Swiss Re, the combined global natural-catastrophe protection gap for 2017 and 2018 was $280 billion – more than half of which resulted from secondary perils. That underinsurance problem is due to both a lack of consumer awareness and the industry’s hesitation to provide coverage when risk is uncertain. Secondary perils are often highly localized, and assessing their risk can be difficult, Swiss Re said.
“The existing protection gap is an opportunity for insurers to strengthen global resilience,” said Jérôme Jean Haegeli, Swiss Re group chief economist. “Underwriting catastrophe business profitably means looking at peak – and also forward-looking – trends on secondary perils. By leveraging the latest technology, insurers can focus more on developing appropriately regionalized models to assess the risk posed by secondary perils and develop a greater product range and targeted distribution for catastrophe covers.”