Small, localised and expensive: why we must urgently learn more about secondary perils

With the global pandemic front of our minds in 2020, many natural catastrophe events that would have otherwise made headlines went largely unremarked.

It’s easy to forget that the year started with major wildfires in Australia. The US, too, saw record numbers of wildfire outbreaks – while its east coast was pummelled by severe storms and hurricanes. There was deadly flooding in Asia after the monsoon rains. And the Yangtze River flooding was the worst in decades.

In all, the world suffered USD 202 billion-worth of economic losses due to natural and man-made catastrophes last year. And nearly 8,000 people died or went missing as a result of disasters.

The insurance industry covered USD 89 billion of these costs – the fifth highest amount since 1970. This was well above the previous 10-year annual average of USD 79 billion, according to Swiss Re Institute’s latest sigma research into natural catastrophes.

And yet this massive total comes despite no single major catastrophic event. Our report demonstrates that more than 70% of the insured losses last year from natural catastrophes resulted from secondary perils – that is high-frequency, low-to-medium-severity events such as thunderstorms, hail, wildfires, drought, flash floods and landslides.

A lot of small events quickly add up

Taken on their own, secondary perils usually don’t cause widespread losses or lead to massive pay-outs for the insurance industry. So, compared to primary perils like tropical cyclones or earthquakes, they typically have less attention paid to them by governments, researchers and the insurance industry.

But taken collectively, secondary perils account for a growing number of losses. They happen more often than primary perils − and in recent years are occurring with increasing frequency.

Our understanding of these perils is, however, lacking. Modelling capabilities for secondary perils are less mature than for primary perils. They are harder to predict, their impacts are more localised and the cost is strongly related to where they hit – in more urban areas the fall-out will be greater.

Much of this knowledge gap boils down to a lack of granular data and consistent monitoring. The problem is that secondary perils are relatively frequent but tend to be relatively small, so they are often harder to track. And when they hit in remote areas, no one may really monitor them.

“If you take the wildfires in 2020 in Australia and the US, for example, they were of apocalyptic dimensions. And all media outlets reported on them,” explains Andreas Weigel, Weather Peril Lead at Swiss Re, and co-author of the report.

“But when you think of a hailstorm, it can locally cause a lot of damage, and can happen essentially anywhere in the world, but would be less likely to make international headlines.”

We need to understand where climate change fits in

We also have an incomplete picture when it comes to understanding what shapes these secondary perils. Not enough is known about the extent to which they are already now driven by climate change. And we still need to improve our understanding of the role of increasing urbanisation and other human factors.

What is clear, though, is that urban sprawl and population growth in high-risk areas, such as along the coast, is increasing the number of assets and people that are in harm’s way.

“The evidence around the links between climate change and secondary perils, especially severe convective storms, is imperfect. It's an active field of research and there are no definitive answers. But while climate change may not be the main risk driver at the moment, we expect this to kick in more forcefully in the future," says senior catastrophe data analyst Lucia Bevere, who co-authored the report.

Insurers can drive greater understanding

Unlike primary perils, which are often geographically limited to certain areas like earthquake zones, secondary perils can affect everyone. So we urgently need to give more attention to them and make them a priority topic.

Re/insurers have an important role to play to further strengthen global resilience. This requires raising more awareness of these perils – and how they translate to losses on the ground. As an industry, our data analysis has already given us a partial picture, but we need to be more active in calling for greater action and understanding.

Government agencies, insurers and insurance associations should put in place more comprehensive claims monitoring, and that information should be shared with all stakeholders where legally permissible. Re/insurers, meanwhile, should support open-source loss modelling frameworks for risk assessments, which could boost the establishment of new model development firms, closer to emerging local trends.

“The insurance industry can shape our response to risks by making sure that premiums reflect the real cost and signal the real risk,” says Bevere.

“We can collaborate with homeowners and businesses to ensure they are taking steps to mitigate risks. But ultimately we all need to work together to get a better understanding of these risks so we can boost resilience.”

Let’s not forget primary perils

Although 2020 has turned our attention to secondary perils, we cannot forget the risk that primary perils still pose. They, too, are increasing in severity and frequency, driven by the same dynamics of urbanisation, human activity and climate change. It was largely down to luck that nothing major hit in 2020 − but 2021 could be different.

The 2020 North Atlantic hurricane season was extremely active – there were a record-breaking 30 named storms. This fits in with a wider trend over recent years of more frequent and extreme storms. And with more urban expansion and infrastructure, each of them can cause far greater losses than would have been the case 20 years ago.

As the threat from all perils – and the losses that ensue – continues to mount, the insurance industry needs to work with governments, analysts and other relevant parties to make sure we develop a more rounded understanding of the risks that we face.

Action now will help us develop better mitigation strategies and increase resilience as we start to feel the impact of climate change.

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