Natural catastrophe losses driven up by secondary perils
One reason the impact of secondary perils is underestimated is their impact is masked by losses from primary events.
The insurance industry has experienced an unprecedented number of natural catastrophes in recent years. And while these events have delivered a wake-up call to the industry, there is an affiliated risk that is just as concerning.
According to the latest sigma report from the Swiss Re Institute, secondary perils have been major drivers of devastation and financial loss in recent years. Insured losses from natural catastrophes in 2018 were $76 billion, according to the report, and more than 60% of the losses resulted from secondary perils.
There are two types of secondary perils:
Independent secondary perils — These include landslides, drought and wildfire outbreaks, which are often not modeled and receive little monitoring by the industry, and;
Secondary-effect of a primary peril — These include hurricane-induced precipitation or a fire following an earthquake, which are not always well-captured in primary peril models or for their severity potential.
The rise of secondary perils
The Swiss Re Institute expects losses from secondary perils to continue because of climate change, urbanization and rising concentration of assets in areas exposed to severe weather such as long coastlines and in river plains.
As extreme weather events show no sign slowing down, predictive models will need to find a way to properly assess secondary perils. One reason they’re often underestimated is that their impact is masked by losses inflicted by primary events, as was the case in 2017 with Hurricanes Harvey, Irma and Maria.
“Large losses from secondary perils are occurring more regularly,” Edouard Schmid, Swiss Re’s Group chief underwriting officer, stated in the report. “This is a trend the insurance industry must act on so that we can continue to underwrite catastrophe business sustainably.”
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