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The blazes that swept across the Hawaiian island of Maui this week, killing at least 36 people and destroying dozens of buildings, are the latest sign of the growing threat to insurers from events that were once considered frequent but less costly risks.
Disasters such as wildfires, storms, and floods, called secondary perils because they historically led to lower losses than catastrophes such as earthquakes and hurricanes, have led to an increasing amount of insured losses. They are increasingly hitting the bottom lines of property and casualty insurers and the reinsurers that help them handle risk.
“We can’t ignore them anymore because they are eating away at the insurance companies,” said Megan Hart, managing director on the climate risk advisory team at Aon , the insurance broker and professional services firm.
“If you look at cumulative losses from hurricanes and severe convective storms over the last 20 years, you almost end up with the exact same overall losses. It’s just instead of this big jump from individual hurricanes you’re getting a lot of severe convective storm events that are leading to aggregate losses that really do rival some of the larger hurricane events,” she said.
“And, we’re starting to see larger, more severe events as well. While historically, severe convective storms were thought of as death by 1,000 paper cuts, now we’re seeing events that are hitting very large metropolitan areas and can lead to extreme single-occurrence losses.”
On Wednesday, reinsurer Swiss Re warned about the increasing losses from secondary perils, especially severe thunderstorms.
For the first half of the year, global insured losses from natural catastrophes stood at $50 billion, compared with $48 billion in the first half of 2022. Severe convective storms, which are associated with thunder, lightning, heavy rain, hail, strong winds, and sudden temperature changes, caused $35 billion—nearly 70%—of insured losses worldwide, Swiss Re said. “This means that insured losses are almost twice as high in a six-month period as the annual average of the last 10 years,” the firm said.
In the most recent quarter, insurance companies Allstate (ticker: ALL) and The Travelers (TRV) reported that catastrophe losses had hit their bottom lines harder than usual. Allstate reported $2.7 billion in catastrophe losses for the second quarter while Travelers paid $1.5 billion in catastrophe damages, twice as much as the $746 million in the year-earlier period.
Insurance companies are responding by seeking to get a better understanding of secondary perils, which haven’t been modeled to the same extent as disasters such as earthquakes. Some are also shifting the focus of their businesses, tightening their terms, or raising prices.
In contrast to Allstate and Travelers, Everest Group (EG), which provides reinsurance and insurance, reported lower catastrophe losses—just $27 million.
Reinsurers have raised prices and moved up the “attachment points” at which reinsurance comes into play. That means primary insurers hold more of the risk for catastrophe losses.
“The reason for that was because we have moved further up, away from risk, and because we have tightened our contractual terms,” Juan C. Andrade, CEO of Everest Group, told Barron’s.
In midmorning trade, shares of all three companies were up slightly: Allstate traded up 2.4% at $112.27, but is down 17% this year. Travelers gained 0.6% to $168.24, but that stock has also lost ground in 2023. Everest Group was up 1.5% at $364.32 for a gain of nearly 10% this year.
All three stocks are far behind the S&P 500, which has surged nearly 18%.
“The topic of primary versus secondary perils has taken on heightened significance in recent years as these so-called secondary perils—marked by higher-frequency/lower-cost events—have shown accelerating loss growth and often aggregate to higher annual totals,” said reinsurance broker Gallagher Re, in a report on natural catastrophes in 2022.
Write to Lauren Foster at lauren.foster@barrons.com