Beazley: A line in the sand

The devastation wreaked by wildfire in Maui joins a growing list of events, from flooding in California to freezing conditions in Texas, described as unprecedented. The term, while accurate, is being used with growing frequency.

Convective storms are now causing tens of billions in insured losses in the US. The estimates of the impact of the Maui wildfires are already many multiples of previous years and Canadian wildfires now exceed $1bn in losses annually more often than not. We could go on. Yet, these remain as so-called secondary perils.

History tells us losses from wildfires, from flooding, from convective storms, should be dwarfed by windstorms and earthquakes. The latter are the capital impacting events on which the industry has long been focused.

The reinsurance industry can absorb isolated incidents of wildfire on the scale seen in Maui, but, when these are occurring in multiple regions with greater frequency we need to reconsider the way we think about these perils. While they may be secondary in their individual cost, when combined they now sit alongside a major hurricane in their total cost.

In the face of this continuing and growing challenge the reinsurance industry is, with some exceptions, actively changing its approach to how it views secondary perils.

Market expansion

The increasing frequency of extreme weather events outside of the traditional natural catastrophe zones is increasingly being taken into account when looking at pricing across the board.

With the impacts of climate change only going in one direction more and more events will be fall into the ‘unprecedented’ category.

With these dynamics in full play, any expectation that after the significant pricing uplifts seen this year that there will be a slide backwards, or that a benign wind season will see rates drop should be quashed.

The impact of climate change both now and in the future, needs to become embedded into all our discussions with carriers about the potential loss profile that these secondary perils are likely to continue to impose on reinsurers. In doing so, we can reset the dynamic with reinsureds and better align with the reality of climate change.

Extreme events in areas with limited experience of them is now the norm. Across the reinsurance market we must expect it and embed it into how risks are priced. As a market, reinsurers should be expanding into, not retracting from, secondary perils.

We should be offering risk reflective pricing to cover the real threat posed by wildfires, flooding and convective storm, factoring in the uncertainty around these perils. We should be adding our risk management expertise to address the potential impact of these perils and improve resilience. The cost will be high, but it will provide greater certainty.

Modelling of flooding, wildfires, heatwaves and winter storms has improved markedly and significant effort has been made to better understand the threat posed both in terms of more severe events and the impact on previously unexposed areas.

We have done the research and the market can expand to cover all risks, secondary and tertiary, in previously unexposed areas and where the severity is many times what it once was. But that will require pricing momentum to be sustained and rates to continue to track upwards to reflect the impact that a changing climate is having on property risks.