sigma 2/2019: Secondary natural catastrophe risks on the front line
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Global insured losses from natural catastrophe events in 2018 were USD 76 billion, the fourth highest on sigma records. More than 60% resulted from so-called "secondary" perils. The combined insurance losses from natural disasters in 2017 and 2018, meanwhile, were USD 219 billion, the highest-ever for a two-year period. Here too, more than half of the losses were due to secondary perils.
What are "secondary" perils?
Secondary perils come in two forms:
- independent, high-frequency (ie, more frequent than primary peril events like earthquakes and hurricanes), low-to-medium severity loss events; and
- events that occur as secondary effects of primary perils (eg, a tsunami after an earthquake).
Losses from secondary perils have been rising due to rapid development in areas exposed to severe weather and warmer temperatures. It’s a trend Swiss Re Institute expects to continue given ongoing urbanisation in areas exposed to flooding and fire risk among others, and because of climate change.
Coming to terms with a growing trend
The insurance industry is well-stocked to take on these risks. According to Swiss Re Institute estimates, total capital in the non-life re/insurance (including alternative capital) sector stood at more than USD 2 trillion by the end of 2018. Even so, the natural catastrophe protection gap for 2017 and 2018 combined was USD 280 billion. Once again, more than half this large level of underinsurance was due to uninsured losses from secondary peril exposures.
There are many reasons for underinsurance of secondary peril risk. A main explanation is that risk assessment can be difficult given the unique features that many secondary perils present. For example, secondary perils are often highly localised, but with variables that are in a continual state of flux given land-use changes and greater occurrence of extreme weather.
Such complexities has led to a lack of associated insurance covers. This is changing, however. Leveraging latest technologies, insurers can and are improving their risk-modelling capabilities and develop new solutions for primary and secondary perils to help reduce underinsurance of catastrophe risks.
Learn about latest state-led initiatives to encourage uptake of earthquake insurance in Italy.
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