Natural catastrophes in focus: Tornados, hail and thunderstorms

Insured losses from secondary perils¹ have been growing steadily over the past decade, including losses from severe convective storms (SCS). These represent the biggest loss driver among secondary perils. Although SCS such as tornados, hailstorms and thunderstorms, are often short-lived events of finite scale, they sometimes hit suddenly and with extreme intensity.

During the last decade, these weather events were the main loss-causing secondary peril in North America and Australia and are now a dominant driver of losses. In North America, accumulated insured losses from severe convective storms over the period 2011–2020 exceeded those from all primary perils combined.

While climate change has contributed to increased frequency and intensity of many weather-related perils, its impact on SCS is less straight forward and remains under scrutiny. Recent loss increases are mainly attributable to socio-economic trends, including rising property values and repair costs, as well as increased development in areas impacted by SCS.

Broad shifts in the economy or land uses also contribute to evolving SCS risk. The proliferation of renewable energy resources, including small- and large-scale photovoltaic installations, has led to increased vulnerability to potentially substantial SCS-related losses.

_{¹ Secondary perils are high-frequency, low-to-medium severity loss events such as hailstorms, flash floods, tornados, landslides, drought and wildfires.}

Thunderstorms are fairly common around the world and usually result in minimal damage, except when heavy rainfall causes significant flooding. High-intensity events, such as derechos, defined as widespread, long-lived windstorms linked to fast-moving thunderstorms or showers, can cause significant wind damage and flooding.

The majority of SCS losses are caused by hailstorms, with a significant percentage of losses resulting from damage to vehicles.

Tornados develop very quickly and cause high damage in a limited geographic area due to their powerful, concentrated winds. For those living in areas impacted by tornados, the most important factor is heeding tornado warnings and access to safe locations in which to shelter when a storm is imminent to avoid injury and loss of life. Buildings made of stone, steel or other materials that can resist high winds are other adaptive options to reduce tornado-related losses but may come with prohibitive costs.

According to Swiss Re Institute, about 50% of the world’s insured secondary peril losses have come from SCS over the past 10 years, with about 50–80% of SCS losses resulting from hailstorms. During the past two decades, the average annual number of loss-generating SCS events in North America has risen by about 2% per year.

During the five-year period 2018 – 2022, the total insured losses from SCS was USD 133bn (adjusted to USD 2023), 90% higher than the prior five-year period (2013 – 2017). This was driven by significantly larger losses in 2020, 2021 and 2022.

Insurers may underestimate the losses from SCS because single events rarely result in a large economic or insured loss. However, the cumulative effect of frequent, low-loss events, along with increasing property values and repair costs, may mask the true impact on an insurer's profitability over a longer period. A more holistic view of this peril is critical to assure proper underwriting and risk management for insurers.