By The recent devastating wildfires that ravaged the Hawaiian island of Maui, claiming the lives of at least 36 individuals and causing extensive damage to numerous structures, serve as a stark reminder of the escalating risks posed to insurance companies. Once considered relatively frequent but less costly occurrences, secondary perils like wildfires, storms, and floods are now resulting in a growing number of insured losses. This trend is impacting the profitability of property and casualty insurers and their reinsurers.
Megan Hart, the Managing Director of Aon’s climate risk advisory team, emphasizes the significance of addressing these risks head-on: “We can no longer dismiss them as insignificant threats because they are steadily eroding the financial viability of insurance companies.” Over the past two decades, cumulative losses from hurricanes and severe convective storms have nearly equaled each other in terms of overall financial impact. While individual hurricanes previously accounted for substantial jumps in losses, severe convective storm events are now leading to aggregate losses that rival those caused by major hurricanes. “Furthermore,” Hart explains, “we are witnessing the emergence of larger and more severe events. Severe convective storms, which were historically akin to a series of gradual losses, are now striking densely populated metropolitan areas and producing extreme single-occurrence losses.”
Swiss Re, a prominent reinsurer, recently issued a warning regarding the escalating losses associated with secondary perils, particularly severe thunderstorms. During the first half of this year alone, insured losses from natural catastrophes worldwide reached $50 billion, as compared to $48 billion during the same period in 2022. Severe convective storms accounted for $35 billion—or nearly 70%—of these insured losses. These storms are characterized by thunder, lightning, heavy rainfall, hail, strong winds, and sudden temperature fluctuations. Swiss Re further notes that “insured losses for a six-month period are now nearly twice the annual average of the past decade.”
This mounting threat posed by secondary perils necessitates a proactive approach from insurers to ensure the resilience of their businesses. The risks associated with wildfires, storms, and floods can no longer be underestimated, and insurance companies must adapt their strategies accordingly. As the landscape of natural disasters evolves, it is imperative for insurers to reassess their risk management practices to effectively mitigate losses caused by secondary perils. Failure to do so may jeopardize the stability and long-term viability of insurance companies in an increasingly volatile environment.
Insurance Companies Responding to Catastrophe Losses
In the most recent quarter, insurance companies Allstate (ticker: ALL) and The Travelers (TRV) experienced significant losses due to catastrophes. Allstate reported $2.7 billion in catastrophe losses for the second quarter, while Travelers paid $1.5 billion, twice as much as the previous year.
To mitigate these losses, insurance companies are focusing on understanding secondary perils, which haven’t been modeled to the same extent as major disasters like earthquakes. They are also tightening their terms and raising prices, as well as shifting their business strategies.
In contrast to Allstate and Travelers, Everest Group (EG), a reinsurance and insurance provider, reported lower catastrophe losses of just $27 million.
Reinsurers have responded to the situation by raising prices and adjusting the “attachment points” at which reinsurance comes into play. This means that primary insurers now bear more of the risk for catastrophe losses.
According to Juan C Andrade, CEO of Everest Group, this approach is a result of moving further away from risk and tightening contractual terms.
Currently, all three companies’ stock prices have seen a slight increase in midmorning trade. Allstate is up 2.4% at $112.27, Travelers has gained 0.6% at $168.24, and Everest Group is up 1.5% at $364.32.
However, these stocks have not performed as well as the S&P 500, which has surged nearly 18% this year.
The significance of primary versus secondary perils has grown in recent years. Secondary perils, characterized by higher-frequency/lower-cost events, have shown accelerated loss growth and often lead to higher annual totals, according to reinsurance broker Gallagher Re’s report on natural catastrophes in 2022.
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