Sharp rise in lower tier catastrophe claims triggers policy changes, mitigation strategies
Severe convective storms and wildfires have caused increasingly large insured losses over the past few years due to increased frequency and severity.
By: Matthew Lerner | July 12, 2021
A dramatic supercell over Lubbock, Texas in May of 2021. This storm previously produced a tornado and was beginning to weaken./ Reuters
While traditional windstorm catastrophe losses continue to be a major source of claims, the so-called secondary perils losses are reaching levels akin to moderate hurricane events, experts say.
Insurers continue to focus on loss prevention and risk engineering to combat the rising secondary peril losses but have also begun to make defensive moves.
Secondary perils caused $57.4 billion or 71% of worldwide insured losses from natural catastrophes in 2020, with the main drivers being severe convective storms and wildfires in the United States and Australia, according to a March report by Swiss Re Ltd.
From 1990 through 2020, aggregate U.S. insured losses from severe convective storms and winter storms exceeded losses from hurricanes by 13% and hurricane losses were greater in only six of those individual years, said Christopher Allen, London-based senior product manager with the climate team at catastrophe modeler Risk Management Solutions Inc.
“I think people recognize there’s an increase in the severity and the damage that’s occurring from weather-related incidents,” said Scott Ewing, regional property risk engineering leader in New York for Axa XL, a unit of Axa SA.
Wildfire losses are “starting to rise to levels that potentially affect solvency metrics,” said Michael Young, Newark, California-based vice president, model product management, at RMS.
“There is the potential for a wildfire event as large as $100 million” in the Los Angeles basin area under certain conditions, he said.
As the losses mount, insurers have begun to increase deductibles and pare back capacity, said Michael Rouse, New York-based U.S. property practice leader at Marsh LLC.
“Certainly, there’s been an increase in losses with respect to severe convective storm and wildfire, and we’ve seen increased scrutiny around deductibles and, in the case of wildfire, limitations in capacity from some carriers,” he said.
Insurers are moving to re-underwrite and reprice exposures in regions of the U.S. that have experienced persistent severe weather in recent years, said Randy Fuller, managing director and head of the North America property center of excellence for reinsurance brokerage Guy Carpenter LLC.
“Many carriers are adjusting wind and hail deductibles. Coverage considerations such as actual cash value for roofs instead of replacement cost coverage are becoming more prevalent,” he said.
The February U.S. winter storm Uri was a case in point, Mr. Fuller said. The storm “activity impacted a number of carriers and reinsurers. This rare, large first-quarter event required some primary carriers and reinsurers to reassess their cat risk management strategies for the remainder of the year.”
Risk assessment and catastrophe management need to be updated, said Mohit Pande, head of property underwriting, U.S. and Canada, at Swiss Re.
“Up to now, risk assessment has focused less on secondary perils than primary perils and we feel that a rebalance is required. Given the rise of their associated losses, secondary perils need to be better understood for the purpose of more complete and accurate risk assessment,” he said.
Risk managers are changing how they prioritize risk improvements and budgeting for those improvements, said Amy Brown, staff vice president, manager for natural hazard underwriting, at FM Global.
“As secondary perils are becoming more frequent and are having a larger impact to loss trends, risk managers are doing their due diligence to see how it affects their portfolio and where it makes sense to adjust one’s priorities,” she said.
Risk mitigation for secondary perils can be straightforward and inexpensive — from adding extra fasteners on the corners of roofs to ensuring that ducts and vents are sealed against embers, she said.
The Insurance Institute for Business & Home Safety conducts research on building materials, such as asphalt shingles, to promote fire resistant construction and hail resistant roofing systems, said Anne Cope, chief engineer at IBHS in Richburg, South Carolina.
Maintenance of structures such as roofs is also important as an aged system will perform less well than a new system, said Chris Cioffi, commercial lines engineer at IBHS.
Studies have shown that investments in mitigation can return up to four times their cost in savings, he said.