Insurers urged to adapt reinsurance structures as secondary peril losses climb: Marsh Re

As insured losses arising from secondary perils, such as severe convective storms, wildfire, winter storms and flood, continue to be a major contributor to insured catastrophe losses in North America, reinsurance broker Marsh Re has outlined that this shift is placing greater pressure on insurers to reassess their reinsurance arrangements.

In a recently published report, Marsh Re, underlines that conventional reinsurance strategies have not fully adjusted to this shift, as many programmes, models, and pricing frameworks continuing to prioritise protection against rare, large-scale catastrophic events, rather than recurring, less severe events.

The broker outlines that disconnect has created a “fundamental strategic challenge for insurers,” and that closing the gap is fast becoming a way for insurers to stand out from competitors.

US-insured severe convective storm losses have exceeded $30 billion a year every year since 2020, and topped $40 billion in four of those years, Marsh Re’s report stated.

At the same time, the broker also highlighted that the January 2025 Los Angeles wildfire produced the largest insured wildfire loss on record.

Marsh Re also indicated that a season of 15 midsize hail events can do more damage to an insurer’s income statement than the one-in-100-year hurricane that still anchors many capital models.

Importantly, this problem has heavily grown since the 2023 reinsurance market reset, which pushed retentions higher. The broker said that this development has reduced the proportion of catastrophe claims absorbed by reinsurers, which has caused for more of the cost of these frequent, smaller events to fall on primary insurers’ balance sheets.

Additionally, Marsh Re noted that catastrophe models for secondary perils continue to improve but stressed that validation remains uneven. The broker’s testing found that model loss estimates can shift materially from one release to the next, and results for the same portfolio can vary widely, especially in less mature areas, such as urban conflagration.

Kim Roberts, North American Peril Advisory Leader, Marsh Re, and author of the report, commented: “The insurers that outperform over the next cycle will be the ones that bring the same discipline to hail, wildfire, and winter storm that they apply to capital planning and reinsurance strategy. That means knowing where their portfolios are most exposed, validating models against their own claims experience, and structuring protection around repeated midsize losses, not just the rare peak event.”

As part of its recommendations, Marsh Re suggests that insurers combine vendor model output with their own claims experience and validate results before using them to make decisions.

The broker also calls for better exposure-level mitigation data, from roof age and construction to community resilience measures, to help sharpen risk views.

Marsh Re also suggests that insurers review the design of their reinsurance programs around the accumulation of losses, through annual aggregate covers, second-event reinsurance layers and low-attaching structures.

Marsh Re also acknowledged that obtaining these structures at acceptable prices is difficult for some insurers across the market. The broker also indicated that access to reinsurance capacity will increasingly depend on the quality of insurers’ exposure assessments and will go to portfolios which effectively demonstrate that risks are modeled accurately and completely.

It’s important to remember that both the catastrophe bond and broader insurance-linked securities (ILS) market continue to provide aggregate reinsurance and retrocession capacity, where programs are well structured, the terms of coverage are appropriate and balanced between parties, and pricing is deemed to be reasonable.