Secondary perils can take on primary importance from a reinsurance perspective

Guy Carpenter’s William Stikeleather and Kristie Kaminski on the increasing industry impact from secondary peril events.

Defined as small to midsize loss events impacting the (re)insurance industry, secondary perils have traditionally garnered less attention than primary perils such as hurricanes or earthquakes.

However, the increasing frequency of losses from secondary peril events such as wildfire, severe convective storm (SCS) and flood poses a variety of challenges for the (re)insurance industry.

Wildfire

Across the US, the acreage burned by wildfires has increased steadily since the 1980s, underpinned by increasingly favorable weather conditions for fire development and spread.

Climatic pressures are not the only force increasing wildfire exposure, as changing population patterns have also played a role. Increasing development in the western US along the wildland-urban interface (WUI) – the transition zone between wilderness and land developed by human activity – places more insured value at risk.

This combination of changes in climate and population patterns has put pressure on the insurance industry. Robust underwriting strategies within regions of increasing wildfire risk, especially along the WUI, will be critical to curb increasing losses.

Severe convective storms

The US has observed a rise in the frequency of SCS losses, driven by factors including spatial changes in individual sub-perils (e.g., hail, tornado and wind), demographic shifts and economic influences.

As the transition from El Niño to La Niña has unfolded over the course of 2024, tornado and wind events have reached near-historic highs, while hail events have remained on par with historical averages. Given the uncertainty surrounding the annual variability of these storms, strategic risk and accumulation management are critical for favorable underwriting results. Increasing retentions of catastrophe excess of loss reinsurance programs, in conjunction with limited capacity of aggregate reinsurance products, results in more retained loss by primary insurers.

Flood

Under climate change, precipitation-related flooding is projected to increase due to a warmer atmosphere’s ability to hold greater amounts of moisture. Moreover, changes in tropical cyclone behavior – such as heightened storm intensity or reduced storm forward speed

– could potentially impact coastal areas by exacerbating storm-surge-related flooding. Accurate flood modeling, coupled with these considerations, plays a pivotal role in comprehensive flood risk management.

How Guy Carpenter can help

Guy Carpenter helps clients effectively manage secondary perils through a combination of data-driven risk assessment capabilities, thorough evaluation and validation of vendor catastrophe models, and educational initiatives focused on mitigation and resilience.

Clients are empowered through a comprehensive suite of peril-specific risk scores, enabling them to evaluate the concentration of risk from secondary perils and shape their territory and underwriting strategies accordingly. Through insights into both present and potential scenarios, these scores allow clients to assess the combination of frequency and severity elements of risk within their portfolio. Additionally, deterministic analyses through the GC Peak Concentration Tool Suite or GC AdvantagePoint® can further assess portfolio vulnerability against accumulations from multiple loss events.

Through model suitability analysis, Guy Carpenter evaluates the effectiveness of vendor catastrophe models in estimating potential losses. This comprehensive assessment includes validating exposure characteristics, assessing loss history against modeled losses and evaluating modeled hazards and return periods against historical events. With this information, clients can develop a personalized view of secondary peril representation by vendor models, facilitating informed decision-making.

In addition to these services, Guy Carpenter has partnered with the Insurance Institute for Business & Home Safety to bring wildfire and SCS resilience research to clients in both personal and commercial lines. Programs such as the Wildfire Prepared Home Standard, if implemented properly, can reduce risk on both the property and community levels. Such initiatives empower clients to educate policyholders on resilient building practices, effectively reducing the likelihood of losses and enhancing overall risk mitigation efforts.

William Stikeleather and Kristie Kaminski are both meteorologists and members of the North America peril advisory team at Guy Carpenter