The annual reviews of natural catastrophes published by major brokers and reinsurers are out and it’s not every year that they suggest a fundamental reassessment of the way the industry talks about catastrophe risk.
Reviews this year published by Aon and Gallagher Re challenge the traditional classification of perils into primary and secondary.
Connected to this is the emphasis on one peril in particular - severe convective storms (SCS), the ostensibly 'secondary' peril that not only was responsible for the highest global insured losses in 2023 but also surpassed the $50bn threshold for the first time on record.
Out with the primary and secondary, in with the peak and non-peak
It is evident that secondary perils such as floods and storms, traditionally associated with generating low-to-medium-sized losses, are impacting (re)insurers almost as much as primary perils such as earthquakes and hurricanes.
Aon's list of the top 10 global insured loss events features only one primary peril event for 2023. The report attributes the largest loss to US droughts, after two droughts also made the top 10 list for 2022.
Notably, while the earthquake sequence in Turkey in Syria resulted in the highest economic losses last year, it did not constitute a major loss for insurers due to the protection gap in insurance coverage. Aon reported insured losses of $5.7bn from the earthquakes and Gallagher Re reported losses of $6.1bn.
Regrettably, this meant there was a notable increase in the protection gap in 2023, following a year when the gap was at its lowest on record, according to Aon data.
2023 was, in short, a high loss year despite the absence of a major market event such as a landfalling US hurricane.
This evolving trend is nudging the industry to reconsider the current categorisation of natural catastrophes and possibly making the grouping of perils into primary and secondary redundant.
Gallagher Re, for instance, suggests that usage of ‘peak’ and ‘non-peak’ is likely to be a more appropriate way of classifying perils. However, it suggests leaving it up to individual companies to define which perils are peak and non-peak, depending on their portfolios – which could make cross-company comparisons more difficult.
Aon, on the other hand, did not overtly call into question this categorisation; nonetheless, its report subtly suggested a shift in its perspective in the way it referred to secondary perils as ‘so-called’.
Safe to say, a change in the way the (re)insurance industry talks about the “new normal” is palpable.
Nearly 60% of global insured losses are accounted for by SCS: Gallagher Re
Historical records were shattered as a result of SCS activity in 2023, leaving carriers with little respite. Particularly in the US, primary insurers bore the brunt of claims from SCS, a peril traditionally associated with lower severity and higher frequency.
Aon’s report notes that seven out of 10 of the highest global insured loss events in 2023 were US SCS.
Even so, 2023 was hardly an outlier in terms of SCS occurrence in the US. The chart below shows that while the frequency of such events was above average, it was not an exceptional year for the peril.
Europe also witnessed an increase in insured losses from severe thunderstorms last year, even though the US is geographically more prone to this peril.
Aon estimated global SCS losses at $70bn, while Swiss Re reported insured losses of $60bn in its preliminary figures released in December.
Gallagher Re reported SCS losses of $59.7bn in the US, which is nearly 36% higher than the previous peak of $44bn recorded in 2020, as the chart below shows.
Overall, the $100bn insured loss threshold was again surpassed in 2023 on the back of these SCS losses.
In its report, Gallagher Re noted that in 2023, non-peak or secondary perils accounted for 67% of loss costs, which is 11% higher than the 21st-century average for such perils. Out of this, 57% of global insured losses were attributed to SCS.
It’s also noteworthy that SCS losses in 2023 were nearly 200% higher than 21st century levels. On the other hand, losses from tropical cyclones were down 80%.
Out of the top ten costliest convective storm events in recent years, three occurred last year.
An inconclusive climate change connection
While it may seem obvious to link higher levels of insured losses from secondary perils to climate change, the reality is complicated.
This publication noted last year that - while environmental scientists were clearer about the impact of climate change on the frequency and severity of perils such as drought, wildfires and floods - there is a relative lack of consensus about the connection with other perils.
Aon’s 2023 report reiterated this and took a cautionary stance on the relation between climate change and severity of SCS, noting that current scientific knowledge does not explicitly show climate change’s impacts on the frequency and intensity of storms. It says there is ‘little evidence’ that climate change is impacting key variables that influence SCS.
In its Sixth Assessment Report, the IPCC acknowledges that it is especially difficult to track trends in the case of SCS as their definition varies depending on the literature and region.
In order to work on mitigating this particular risk, then, it might be better for the (re)insurance industry to focus elsewhere.
In a separate report also released in December, Swiss Re attributed rising SCS losses to socio-economic trends such as rising property value and repair costs and increased development in areas impacted by these storms.
In an interview with this publication in September, John Jacobi, the managing director of Aon’s reinsurance solutions’ US actuarial team, said that he doesn’t think climate change is central to tackling the SCS peril.
“Going forward,” he said, “the industry’s emphasis for the SCS peril should be less on climate factors and more on traditional risk management to help shape better decisions.”
Correction: This article has been amended to clarify that Gallagher Re's reported figure of $59.7bn refers to SCS losses in the US only, rather than globally.