Rising Costs of Secondary Perils Force Reinsurers to Require Higher Attachment Points

Economic and insured losses from secondary perils from natural catastrophes are accelerating and surpassing the loss totals from primary perils, leading reinsurers to require higher attachment points, according to Gallagher Re.

“The topic of primary versus secondary perils has taken on heightened significance in recent years as these so-called secondary perils — marked by higher-frequency/lower-cost events — have shown accelerating loss growth and often aggregate to higher annual totals,” said the reinsurance broker in a report titled “Gallagher Re Natural Catastrophe Report of 2022 – January 2023.”

“Secondary perils were again the most expensive on an economic basis and exceeded those on the insured loss side,” the report noted.

Overall economic losses (which include both insured and non-insured losses) from natural disasters were estimated at US$360 billion in 2022, of which $149 billion (41%) came from primary perils and $211 billion (59%) came from secondary perils.

At the same time, total insured losses in 2022 were estimated at US$140 billion, of which $67 billion (48%) came from primary perils and $73 billion (52%) came from secondary perils, according to the report.

Secondary perils are generally defined as smaller to mid-sized events, or the secondary effects that follow a primary peril. Secondary effects of a primary peril could include hurricane-induced flooding, storm surges, hailstorms, tsunamis and fire following an earthquake. Other secondary perils are independent events, often not modeled and receive little monitoring from the insurance industry, said Swiss Re’s sigma, which has described these types of secondary perils, in part, as torrential rainfall, thunderstorms, drought and wildfire outbreaks.

The secondary perils’ loss experience has led traditional reinsurance capital largely to move away “from providing coverage at the lower levels, rejecting 1:3-year-1:5-year event coverage and instead coming in around the 1:10 level,” said the Gallagher report. “It is a much simpler exercise to effectively underwrite yourself out of secondary perils by requiring higher attachment points.”

(Editor’s note: The report is referring to reinsurers’ rejection of coverage for one-in-three-year/one-in-five-year events while accepting one-in-10-year events).

In a separate report, S&P Global Ratings also confirmed that many reinsurers preferred to write middle and upper layers during the January renewals, “thereby moving up on the attachment points, to limit their exposure to frequency losses and hedge against inflation.”

Reinsurers have notched up their attachment points and are “showing less or no intent to write lower layers …,” said S&P, noting that such structural changes, which took place during the January renewals, will be long lasting “because it will be hard for reinsurers to move back on their new attachment points.”

Gallagher Re’s estimates of economic and insured losses were higher than those reported in Aon’s recent natural catastrophe report. Aon listed economic losses from natural disasters in 2022 of $313 billion, with an insurance price tag of approximately $132 billion, compared with Gallagher’s estimated of $360 billion and $140 billion, respectively.

Aon’s figures translate into a global protection gap of 58% — or the difference between total economic losses and what’s covered by insurance — while Gallagher Re estimates that 61% of global disaster losses were not insured.

“The financial cost of natural hazards continues to increase, and we are further recognizing that a consistently high global protection gap — 61% in 2022 — means that much more opportunity exists to help people prepare before and after a disaster occurs,” commented Steve Bowen, chief science officer at Gallagher Re.

“As catastrophe losses grow more expensive, we again look to the connected nature of climate change, exposure growth, and social inflation as important issues enhancing eventual loss costs. The increase in severity, and in some cases the frequency of ‘secondary’ peril events, presents re/insurers with a multi-faceted and complicated challenge when it comes to risk protection and mitigation,” Bowen added.

Topics Trends Reinsurance