Reinsurance/natural disasters: secondary perils are ready for prime time

Batten down the hatches. Despite the hurricane season getting off to a slow start, there is a 60 per cent chance of an above-normal Atlantic hurricane season this year, according to the US National Oceanic and Atmospheric Administration.

This June to November period causes jitters with reinsurers and their investors. Shares typically underperform in the spring and summer, picking up in the autumn when the likely earnings impact from the US hurricane season is clearer.

Reinsurers can take the strain. Munich Re has historically taken the highest share — 3.4 per cent — of the insurance industry’s hurricane losses, says Berenberg. But its balance sheet shows it can cope. In the worst-case scenario, its excess capital of $16.2bn would only be cut by a third, say the analysts.

The focus on hurricanes reflects the extraordinary damage ultra-high winds can inflict. Hurricane Katrina in 2005 still holds the record as the most expensive hurricane ever, costing the insurance industry $87bn in 2020 prices.

But a focus on big events can mislead. The costs of less severe storms, fires and floods quickly add up, given that global warming increases their frequency and severity. In 2021, secondary perils, including floods, accounted for more than 70 per cent of all insured losses, says the Swiss Re Institute. It was the first year that two separate secondary peril events — Winter Storm Uri in the US and July’s floods in western and central Europe — each caused more than $10bn of losses.

There is a big unmet need for insurance. Over the past decade, 83 per cent of global economic losses from flooding were uninsured. But they are hard to model and predict, given less data than exists for hurricanes or earthquakes. That is changing, according to Swiss Re, which says modelling capabilities have improved covering over half its secondary perils exposure.

That confidence needs testing. Climate change makes extreme events more likely. That trend in turn should bring opportunity for these insurers.