Bizarre or the new normal? The challenge of understanding secondary perils

We'll look back on 2021 as the year of the secondary peril. Those are the weather events that are tougher to get our arms around, like flooding or wildfires or winter storms. As a financial first responder, insurers make a promise to protect policyholders from these types of losses, which means the stakes have never been higher to underwrite secondary perils more proactively.

There's a reason they're called secondary perils. They're harder to monitor than hurricanes and earthquakes, which makes them more difficult to model. And they manifest in unexpected times and places. Consider some of the extreme events that made headlines last year:

• Winter storm Uri shocked most of the US last February, and Texas was especially hard hit with record snow and ice and insured losses of USD 15 billion. The storm also exposed the vulnerability of the state's infrastructure, as a surge in demand for electricity led to massive, paralyzing power outages.
• In Canada, an atmospheric river dumped a month's worth of rain over a two-day period in British Columbia, resulting in USD 500 million in insured losses.
• Wildfire destroyed the town of Lytton, BC during a period of record heat and low humidity. The Fire Weather Index, which measures the propensity for fire, is increasing at a faster rate in Canada than just about anywhere in the world.

The average person sees these events as bizarre, a deviation from the norm. But those of us in the business of atmospheric science and peril modeling view them as a new normal. There's much we still need to learn about secondary perils, and, therefore, we must approach our work with a certain amount of humility in the face of these continually evolving weather phenomena. We must also have confidence in the science. I believe the insurance industry is up to the challenge.

We've made great strides in flood modeling. In fact, a growing number of private insurers in the US and Canada are offering flood insurance because there's a greater degree of confidence in the models and mapping technology. As insurers start seeing acceptable loss ratios and a pattern of profitable growth, they must allocate more capacity to this line of business, so takeup will increase and we'll start closing the protection gap.

When it comes to wildfire, mitigation is one of the best tools we have, and it doesn't require a degree in meteorology or atmospheric science to remove trees and brush that can serve as an accelerant. With more people choosing to live in the wildland urban interface, special building standards and codes must be set and adhered to.

The common thread here is reducing and reassessing risk – reducing our risk through mitigation and reassessing that risk with more precise and granular modeling and better data quality. It requires everyone pulling in the same direction– from scientists and modelers to underwriters and consumers. At Swiss Re, we make it a priority to work with our clients to understand the underlying impacts on their portfolios and to develop solutions to help them face the challenge of secondary perils. It's an all-in approach that requires the contributions of everyone in the value chain – from modeling to underwriting to marketing:

• Improved risk data at the individual risk level
• Expanded modeling capabilities
• Greater emphasis on present-day and future view of risk
• Improved education on personal risk
• Expanded coverage for more insureds

One day we'd like to be able to move the list of secondary perils over to the primary column. We haven't reached that point yet, but we're getting there.