Redefinition of “secondary perils” may be needed: Gallagher Re’s Vickers

After another catastrophe loss year where the insurance and reinsurance industry has experienced a significant burden from so-called secondary perils, James Vickers, Chairman International, Reinsurance at Gallagher Re has called for a “redefinition” to be considered.

In publishing a report on 2021 insured catastrophe losses, Gallagher Re’s Regional Director of International Catastrophe Analytics also said that, after another heavy loss year, “catastrophe models are firmly in the market’s headlights.”

Reinsurance broker Gallagher Re estimates that insured losses from major natural catastrophes that occurred in 2021, excluding Covid-related losses, stand at US $116 billion, so far.

Gallagher Re’s estimate of $116 billion compares to Aon’s $130 billion, that also includes public insured catastrophe losses, as well as to  the $120 billion estimated by reinsurance firm Munich Re and the $105 billion preliminarily estimated by Swiss Re in December.

Gallagher Re’s total makes 2021 the third highest year for insured catastrophe losses since 2011, following that year’s $120 billion and 2017’s $143 billion.

At $116 billion, 2021’s catastrophe loss burden for the insurance and reinsurance industry came in some 63% above the $71 billion average annual loss since 2011.

Like those two more costly years, 2011 and 2017, last year’s high catastrophe loss total was driven by the occurrence of multiple major events, in particular US extreme weather and hurricanes, as well as the European flooding and storms.

On Gallagher Re’s numbers, tropical cyclones caused 35% of the overall insured catastrophe loss in 2021, while severe thunderstorms caused another 25%.

North America was the location of 68% of the insured losses, with Europe, the Middle East, and Africa another 23%.

The largest single loss event of the year was Hurricane Ida in August, as you’d expect, but according to Gallagher Re, this hurricane has cost insurers roughly $37 billion, which includes offshore losses, NFIP flood losses and the write-your-own flood insurance program and is an even higher Ida loss estimate than Aon’s $36 billion

Gallagher Re explains that, alongside the larger loss events, 2021 was marked by the occurrence of several unusual mid-sized catastrophe events.

These included winter storms and convective storms, with anomalous events seeing some states that do not typically experience cold weather affected earlier in the year, while tornadoes struck the US midwest in December.

Flooding was the other peril of note, with the European floods from Storm Bernd causing more than $13 billion in insured losses, Gallagher Re said.

Yingzhen Chuang, Gallagher Re’s Regional Director of International Catastrophe Analytics, commented that, “With the large loss experience in 2021, catastrophe models are firmly in the market’s headlights.

“They remain pivotal to enabling conversations around pricing adequacy, secondary perils, climate change, and systemic connectivity of risk, but it has become essential to ensure we understand what models can and cannot contribute to the conversation.

“By necessity, summarising a complex global picture requires some simplifications. However, it is clear that carefully contextualising global loss experience is essential to an industry founded on managing volatility and uncertainty.”

James Vickers, Chairman International, Reinsurance, at Gallagher Re, also stated, “It was a heavy year for natural catastrophes, despite the absence of a very significant single loss event. Notably, claims originating from secondary perils were substantial.

“That perhaps calls for an industry-wide redefinition of the phrase, and is certainly a phenomenon that underwriters are paying close attention to.”

The industry is already becoming much more focused on understanding its exposure to certain secondary perils, while perils like wildfire, floods and hail are already considered primary contributors to annual losses by many in the markets.

As Chuang said, what’s most important is understanding what models can really do for underwriters and where they fall down, while its also critical to be clear that their outputs are directional and not an exact representation of how a peril event will play out.

The industry’s focus on secondary perils, frequency and aggregation of losses, as well as correlation between peril classes, or between primary and secondary, are all likely to increase through the next few years. So a redefinition may not be necessary, but a thorough examination of these factors is vital for informing risk selection and underwriting, as well as and just as importantly hedging decisions, going forwards.