‘Secondary Perils’: A phrase whose time has come?
Swiss Re’s Martin Bertogg, Head Cat Perils & Cyber, weighs in on the evolution of the term and reveals which lesser-discussed peril deserves even more attention than wildfires.
Given the frequency and severity of wildfires and flood events in recent years, one could suggest that the term “secondary perils,” as the industry currently defines them, needs to evolve. Is it still accurate to refer to such perils as “secondary” if they continue to contribute so heavily to insured losses?
Insider Engage put this question to Swiss Re's Martin Bertogg, who is responsible for the reinsurer’s Nat Cat research and model development globally.
Speaking with Shawn Moynihan, Bertogg shared his insights on the topic – and brought to light several types of catastrophes that he says warrant far more attention than they are currently receiving.
Shawn Moynihan [SM]: I’d like your thoughts on whether the way the industry defines “secondary perils” needs to change, given the frequency and severity of losses around events such as wildfires and floods in the past several years. Is that phrase slowly becoming a misnomer?
Martin Bertogg [MB]: "Secondary perils" as a term initially made it onto the industry agenda as a discussion item, but also more recently as a hit to earnings. The term has helped the industry to put under-represented natural catastrophe risk into the spotlight of insurance risk underwriting and management. It resonates with industry participants and observers and highlights the need to address claims arising from small to medium-sized natural catastrophes. Floods and hailstorms, for example, can happen independently and are more frequent than primary perils such as hurricanes and earthquakes.
At the same time, the term is indeed not sharply defined: there are secondary effects of primary perils, e.g., a storm surge following a hurricane; and independent secondary perils (such as hail and wildfires), which generally do not make it on the list of reinsured catastrophe perils.
SM: When might we have to stop referring to these very costly perils as “secondary”? Is there a threshold of loss, for example, that might influence the industry to stop using that phrase?
MB: At this point of the industry discussion, referring to secondary perils clearly has its merits. It allows us to group emerging perils and risk factors in areas where insurance risk modelling is still in its initial stages or not widely practiced yet. Primary perils dominate the global risk transfer and reinsurance agendas because of their large single-event risk and impact on capital levels and solvency.
By contrast, secondary perils have so far mainly affected the primary insurance industry. But this is changing rapidly, with absolute loss amounts of secondary perils growing and biting into reinsurance CatXL and frequency protection – and visibly affecting their earnings.
SM: If we stopped talking about wildfires and flood as “secondary” perils, would other, less expensive perils become classified as “secondary” going forward?
MB: Secondary perils as a term will remain valuable as long as it helps to raise awareness of still poorly modelled perils. In our view it is not about their absolute loss amount, but about the industry preparedness to deal with these perils in a properly quantified risk management framework.
As with primary perils, macro risk trends including climate change, urban sprawl and urbanization will lead to a rapidly increasing claims burden – and that will lead to more robust modelling and risk management practices. At the same time, with these amplifying trend factors, new perils appear on the horizon, like the North American winter storm Uri in February 2021. The pipeline for new secondary perils will not dry out any time soon.
MB: Wildfire events in the U.S., Australia and Canada have hit affected communities hard and resulted in countless human tragedies. This has drawn a lot of industry and media attention, and understandably so. But as this year's sigma shows, lesser-talked-about catastrophes like severe convective storms (SCS) – encompassing hail, tornado, and straight-line windstorms – also deserve closer observation.
2020 has been a remarkable year, with about USD $36bn of insured losses from such events – that's about three times as much as from wildfires. Over the past decade, SCS have cost the industry well above USD $200bn in total, compared to floods (USD $67bn) or wildfires (USD $56bn).
Of course, all secondary perils deserve our attention, as their risk level is not static. Insured SCS losses in the U.S. have been growing by as much at 6.4% annually in two decades, at 2020 prices. From an industry-loss-level perspective, therefore, this risk factor doubled in just a single decade! With such a rapid risk evolution, pricing SCS risk exclusively using an actuarial "rearview mirror" is not a sustainable approach for the industry. Secondary perils, as much as key primary perils, remind us of the need to incorporate forward-looking trends for the coming underwriting years.