Mitigation key to reducing costs of secondary perils

The re/insurance industry needs to do a better job of mitigating against climate-related perils if it wants to avoid incurring increasing costs from so-called secondary perils, a panel at the Bermuda Risk Summit, taking place in Bermuda this week, agreed.

There have only been three years in the last 20 that primary perils exceeded the insured damage caused by secondary perils, Jeff Manson (pictured), senior vice president, underwriting, of RenaissanceRe, said.

He was moderating a panel discussion called “Risky Business: Minor Perils become Major Events”, which looked at how secondary perils have been driving losses through the industry.

“Minor perils are real and will not go away,” said Aspen president Christian Dunleavy. “They are going to build. They tend to be more localised events, and it makes modelling more difficult.

“We have had a prolonged period of losses and insurance is a huge cost to consumers,” he said. “The industry is working hard to bring capital to the table and provide solutions along the way, but it is easier said than done. There are no quick fixes.”

Stephen Moss, head of investor analytics at insurance-linked securities manager Aeolus, said that any peril could become a peak peril if the cost was overlaid on the risk.

He said the Los Angeles wildfires were a surprise to investors who were not expecting so much damage from the fires.

But he added: “These are unusual events, but they will not go away.”

Asked if investors were talking about return requirements, Dunleavy said the reinsurance reset of 2023 came at a moment when investors were asking if the risk was insurable.

He said the reset was needed to address increased property values and the inflation increases which meant attachment points had slipped.

He noted that the public stock markets disliked earnings volatility, which meant that companies like Aeolus dealing with private investor capital might be in a better place to deal with the risk as long as claims were paid even when they might not have been modelled.

Dunleavy said the practice of writing annual re/insurance policies was also difficult when dealing with a long-term problem like climate change.

Moss agreed, saying the ILS industry had to capital raise every six months, which was challenging.

But he noted that the industry had been disciplined and had provided capital protection to cedants. He said investors were aware of the expenses that came with insurance but said the industry needed to avoid surprises which would lead to a mass exodus of capital.

Moving to mitigation, Manson said the Institute for Building and Home Safety had shown that better building materials could make homes more resilient against hurricanes and wildfires.

Tim Temple, the Louisiana Insurance Commissioner, said the state had passed legislation for a fortified roof programme, a decade after Alabama which now has 50,000 fortified roofs. Louisiana now has 5,000.

He said he would also be going to the Louisiana legislature for a permanent funding solution for the roofs.

Manson said the California wildfires were an example of the need to build back better and that it was important homes were built to a resilient standard.

Dunleavy said Bermuda was an “amazing case study” of how building codes work, showing how additional short-term costs could be made up in the long term.

“Construction costs are high, but you do not get total losses here,” he said.

Moss, who spent 15 years at catastrophe modeller RMS, said models could tell people that if they built in a particular location with adequate mitigation it would result in savings on their insurance premiums.

The panel agreed legal reform was part of the solution, as demonstrated in Florida, where litigation reforms cracking down on fraud appeared to be working. As a result, capital was returning to the market.

Changes in the regulatory framework had led to primary insurance rates in Florida falling, Manson said.

“You want a functioning market so you can have risk-based price signals,” he said.

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