Increasing Secondary Peril Losses Challenging Insurers' Bottom Lines

Secondary peril events are becoming more severe and are responsible for an increasingly large amount of insured losses, affecting the bottom lines of both personal and commercial lines property insurance companies, according to a recent commentary from A.M. Best.

The commentary, "Secondary Perils Increasingly Responsible for Largest US Catastrophes," noted that while the trend of more frequent and harmful catastrophes is a global issue, the United States continues to suffer many of the most intense and impactful natural disasters in terms of total damages and insured losses.

In addition, demographic shifts and population growth in coastal or other catastrophe-prone areas have raised the magnitude of economic and insured losses, the rating agency said.

"As we have seen with population growth in wildfire-exposed areas in California and other western states—including the recent fires in Colorado—higher economic and insured losses are occurring despite natural catastrophes of lesser intensity," David Blades, associate director, industry research and analytics at A.M. Best, said in a statement.

The Best commentary noted that early estimates of 2021 natural catastrophe losses exceed $105 billion, which would make it the fourth-highest annual total since 1970. Over the past 40 years, a pattern of more frequent and significant natural catastrophes has emerged, Best said, and insurance companies with exposures to secondary peril risks such as wildfires, tornadoes, and severe thunderstorms will face heightened enterprise risk management concerns.

"The fact remains that secondary perils have not been modeled to the same extent as primary perils, although this modeling is evolving, and insurers are taking actions to address exposures to these risks through underwriting and pricing actions," John Andre, managing director at A.M. Best, said in the statement.

In the near term, insurers could see insured losses increased by inflation, demographic shifts to higher-risk areas, and aging building stock, Best said. Those trends will also be reflected in reinsurance prices for primary insurance companies, particularly in loss-affected areas.

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