The pursuit of the right price

Claims activity in the insurance market is increasingly driven by elevated frequency of medium-sized events and secondary perils, rather than by single large-scale events, says Wade Gulbransen, CEO of Howden Re North America.

The frequency of events once termed “secondary perils” – for example floods, wildfires and severe convective storms – has been increasing steadily over recent years. This has become a driving force behind increased claims, straining insurer profitability and impeding capital accumulation for large, significant loss events.

At the same time, reinsurers have shifted risk appetites away from frequency layers to risk positions within programs driven by peak perils such as earthquake, tropical cyclone and large-scale terror events. This trend has left primary insurers with the responsibility of managing and pricing secondary perils, with less reinsurance market participation. As a result, cedants are turning to brokers for strategic guidance.

The last two years have seen a challenging environment characterized by asset price volatility, inflation, higher pricing and reduced capacity. As the next phase of the cycle begins, the industry must focus on evolving risks and approaches which enhance program and pricing efficiency.

The reinsurance market must work together with cedants and capital providers to lead the industry through its most challenging period yet. Brokers, insurers and reinsurers must bring the industry together, foster innovation and develop the tools necessary to meet today’s risks while preparing for those of tomorrow.

When analyzing trends over the last decade on a cumulative, inflation-adjusted basis, it becomes evident that losses from these formerly “secondary perils” have now surpassed those from any other insured natural catastrophe post-2012.

The growing challenge of non-peak perils

Ex-hurricane severe weather is increasingly driving insured losses, cumulatively outpacing tropical cyclones over the last decade. This trend, while acknowledging the volatile nature of these cyclones, underscores the growing role of “non-peak” perils as major loss drivers. This is reinforced by the upward trend in flood and wildfire losses since 2016. Global insured losses from severe weather (excluding tropical cyclones) accounted for approximately 90 percent of the total ($93bn of the $105.6bn annual average).

There is always a limit to how much risk insurers can retain; some are already reassessing participation by line of business. This is evident in high-risk areas such as California, where several carriers have ceased underwriting wildfire coverage.

Toward a more resilient risk pricing model

The path forward requires the entire industry to protect against future losses through balancing investment in preventative infrastructure and introducing new capacity to market.

Intermediaries and capital providers must now collaborate with insurers and reinsurers to quantify accurately the cost of secondary perils, establish the appropriate risk margin for assuming this exposure, and build balanced portfolios that generate profits to absorb the increased frequency and severity of these risks.

A comprehensive view of secondary perils deepens insights into the true “cost of goods sold” for these risks. Real-time catastrophe risk rating enables more accurate pricing and highlights aggregated exposure. This level of precision allows insurers to develop strategies that accurately reflect the cost of covering secondary perils, ultimately driving higher profits with the same or reduced capital, increasing the overall return on capital.

As the next phase of the reinsurance cycle begins, the importance of resilience, innovation and partnership cannot be overstated. Capacity must be brought to market in a way that balances risk and reward for all parties.

Howden Re is uniquely positioned to support clients in navigating evolving market dynamics, offering tailored solutions to balance risk and reward, and to drive sustainable growth across the global reinsurance landscape.