In addition to major disasters that are particularly destructive, the reinsurance market [4] is facing an upsurge in secondary perils.
These are medium-sized events, linked to global warming [5], such as violent storms, forest fires, localized floods, etc.
Individually, these events are small in scope but combined, they turn particularly costly. For the year 2020, their economic cost amounted to 60 billion USD.
This upward trend in secondary perils is expected to increase in 2021. In the three months from June to August 2021, all four corners of the globe were shaken by weather disruptions: record heat, devastating floods, storms, heavy rains and raging fires.
Secondary perils represent an opportunity for growth and additional premium fuel for the market. Swiss Re [6] expects to see strong growth in the underwriting of this type of business.
Reinsurance up against secondary perils
Reinsurers may be involved in secondary perils as:
- Risk underwriters. In this case, they are required to indemnify cedants for direct damages (properties damaged by a weather event) and for indirect damages caused by the occurrence of an insured secondary peril, such as a disruption of the supply chain [7] following a flood,
- Institutional investors. Loss of value of their investments, assets, shares, ... as a result of damage caused by secondary perils to the property in which they have invested.
To deal with this new threat, reinsurers are required to:
- adopt a new approach to risk, based on a better integration of climate change [8] in hazard management scenarios,
- integrate the human factor into their risk calculations (housing in high-risk areas, uncontrolled development of urban areas, etc.),
- adapt premiums to the risks actually incurred after assessing the sensitivity of rapidly urbanizing areas or those exposed to secondary perils,
- have a good capitalization and sufficient funds to finance the losses pertaining to this type of risk.
