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Rise of the ‘secondary’ nat cat threat

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Losses aside, last December’s near $1.2 billion hailstorm in Sydney has a far more chilling message for Australian insurers: better get used to it.

Hailstorms like that and other “secondary” perils such as floods, bushfires, droughts and liquefaction will remain the biggest source of natural hazard losses, Swiss Re says in its latest Sigma report – Natural Catastrophes and Man-Made Disasters.

For the second year running, small and mid-sized events usually excluded from natural catastrophe risk models have combined to account for the majority of claims payouts.

These and spillover effects from primary perils such as cyclones and earthquakes made up more than 60% of the $US76 billion ($107 billion) insurers worldwide paid last year on natural catastrophe claims.

The Camp wildfire in California, which the industry labels secondary, was the single largest insurance loss event last year at $US12 billion ($16.8 billion).

“We expect that secondary perils (including river and storm surge floods) will, more and more, rank among the top loss-making events in any one year, and that this will happen sooner rather than later,” the Sigma report says.

Insurers need to get a better handle on this. Swiss Re says the industry’s laser-like focus on primary perils, because of the severe losses they cause, has led them to overlook hazards in the second tier.

“This means (re)insurers need to develop enhanced methods of risk measuring, monitoring and modelling to manage a different kind of natural perils result volatility, one that is more frequency-driven than severity-driven,” the report says.

This new approach must address the “strong underlying trend increase in both frequency and severity due to environmental and societal changes, particularly urbanisation. Failure to afford due recognition to these loss events and their underlying growth trend will, over time, risk facilitating increasingly more pronounced market dislocation.”

Growing urbanisation and the increase in climate change-influenced weather events, of which Australia has seen plenty in recent years, will bring an acceleration in the frequency and impact of secondary peril risks.

“Australia is heavily exposed to secondary perils,” Swiss Re’s Head of Property Treaty Underwriting for Australia and New Zealand David Sinai said.

“Sigma states that the growth in secondary peril insured losses is mostly due to concentration of exposure growth in larger cities, in coastal areas and on floodplains.

“Put simply, when we put more assets in harm’s way, we will see more losses.”

The Insurance Council of Australia’s data tallies with Swiss Re’s warning on the heavy financial toll secondary perils are inflicting, according to Mr Sinai.

About 67% of normalised insured losses tracked by the council since 1966/67 could be traced to secondary hazards. They account for 14 of the top 20 normalised loss events, and the 1999 Sydney hailstorm in Sydney ranks as the most costly at $5.6 billion.

“From this we can infer that the main driver of increased losses over time in Australia is growth in underlying exposures, which aligns with our Sigma research on global losses,” Mr Sinai said.

Swiss Re believes the industry needs to readjust its risk lens.

“Large losses from secondary perils are occurring more regularly,” Group Chief Underwriting Officer Edouard Schmid said.

“Secondary peril losses will accelerate due to ongoing urbanisation, also in areas exposed to flooding such as along coastlines and in river plains, development in areas vulnerable to fire risk such as wildland-urban interface, and also because of long-term climate change projections.

“This is a trend the insurance industry must act on so we can continue to underwrite catastrophe business sustainably.”

There is not enough evidence to link climate change directly to increased losses from secondary perils, or even primary hazards, but a warming planet certainly is not helping.

“With climate change, we expect that wildfires and drought will occur more frequently, and that tropical cyclones will possibly be more intense,” the Sigma report says.

“However, climate change itself is not the sole cause of huge resulting losses. Rather, it is the impact of population growth and urbanisation. Weather and other events become catastrophes only when they hit densely populated areas.

“The probability of heavy losses, given growing concentration of economic assets in densely populated towns and cities, has likewise multiplied.”