Flooding in Australia: The reality of a secondary peril

The Australia flooding is an example of how a secondary peril can be a major contributor to a total natural catastrophe loss amount.

The Australian states of Queensland, New South Wales and Victoria have been heavily affected by the December 2010 and January 2011 rainfalls. These events are a prime example of how secondary perils can cause widespread damage to property.

Secondary perils are usually high-frequency, low-to-medium severity events and include phenomena such as floods, hailstorms and bushfires amongst others. Although they are not usually on the same financial scale as earthquakes, hurricanes or winter storms, they can still cause significant damage.

“As a matter of fact, secondary perils are very often underestimated. Typically, these perils are difficult to model. Hence, there are no adequate risk assessment models available which contributes to uncertainty of assessing these perils”, says Jens Mehlhorn, Swiss Re Head Flood Group.

The Australian floods are the latest entries on the country’s list of secondary perils: In the last four years, Australia has been repeatedly affected by events from this category including hailstorms and bushfires. From 2007 to 2010, four secondary peril events caused insured losses exceeding AUD 1,000m (see table below).

Primary perils such as earthquake, hurricanes and winter storms are mostly responsible for natural catastrophe losses on a global scale, but secondary perils have been the main loss drivers in Australia in recent years, underpinning the country’s heavy exposure towards these perils.

As secondary perils are mainly weather perils, they are strongly impacted by large scale weather patterns and climate change. The recent high precipitation rates in eastern Australia correlate with a strong manifestation of La Niña. This weather pattern and its trade winds push warm water towards the east coast. The warm water is a continuous engine of moist air and precipitation. How much the current event is influenced by climate change is difficult to quantify. However, climate change is a fact and there is consensus that large scale weather patterns will be impacted by climate change leading to an increase of extreme weather disasters.

According to Mehlhorn secondary perils have contributed to about 30% of the total insured natural catastrophe losses over the last 30 years on a global level. Insured losses for recent years totaled around USD 10bn annually, which is well above the long term average.

The December 2010 – January 2011 events in Australia underline once again the importance of secondary perils for the insurance industry - a risk which will grow even more in future.

Secondary perils loss events exceeding AUD 1,000m in Australia from 2007 to 2010 (source: Swiss Re sigma)

Date Location Cause Insured loss in AUD m inflated to 2011
07.06.2007-10.06.2007 NSW, Hunter Region, Newcastle, Singleton, Maitland Storms, floods 1,170
07.02.2009 - 14.02.2009 VIC, Marysville, Kinglake, Taggerty, Strathewen, St Andrews, Whittlesea, Wandong Drought, bush fires, heat waves 1,240
06.03.2010-10.03.2010 NSW, Victoria, Melbourne, Ferntree Gully, Tasmania Storms, hail 1,060
22.03.2010-22.03.2010 WA, Perth, Kings Park Storms, hail 1,050

Published 20 January 2011

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