Risk of flood loss is now on par with primary perils: Swiss Re

Secondary peril events such as flooding are becoming just as big of a threat — or worse — to global property and casualty insurers than primary perils, Swiss Re Institute’s recent sigma study finds.

“The loss potential from single flood events today is equal to and can even exceed the losses from primary peril events,” says the Swiss Re report. Over the past decade, Swiss Re observes, the total US$75-billion in insured losses arising from flood events represents 10% of all NatCat insured losses. 

The report defines primary perils as NatCats that happen less frequently, but have a high loss potential. Secondary perils, on the other hand, are NatCats that happen relatively frequently, but typically generate low to medium size losses. 

The report differentiates between independent secondary perils (i.e., severe convective storms, floods, droughts, wildfires, landslides, snow, freezing rain) and secondary-effects of primary perils (i.e., tropical cyclone-induced inland flooding and storm surge; tsunamis, liquefaction and fire following earthquakes). 

Secondary peril events accounted for more than 70% of the global P&C industry’s insured losses over the past year. Two separate secondary peril events led to insured losses of more than US$10 billion — a first for the industry, Swiss Re reports.  

Another event, British Columbia’s November 2021 flooding, was the among the top inland floods in 2021, coming in at the fourth-highest global position, with six fatalities, $3.4 billion in economic losses, and $600 million in insured damages (according to Swiss Re estimates). 

In 2021, insured losses for secondary perils accounted for US$81 billion (73% of total losses), and in 2020, secondary perils accounted for USD $63 billion. 

Comparatively, primary perils in 2021 resulted in US$30 billion in insured losses (27%), a $3-billion increase from the previous year. 

“Whether wildfires, [severe convective storms] or floods, each of the last five years (except 2019) have seen secondary peril events that have caused insured losses of US$5 billion or more. Prior to 2011, secondary peril losses of that severity were unheard of,” the report reads.  

Even as the P&C industry says “flood is the new fire,” Swiss Re finds flood is still considered a secondary peril.  

“Flood is still afforded less attention and rigour in exposure data and modelling data provisions than primary peril risks.” But Swiss Re says this should change. 

“Given the frequency and scale of flood losses, it is incumbent on the insurance industry to extend the reach of risk transfer solutions and increase the financial resilience of households, businesses and communities around the world,” the report reads. 

A better understanding of the risk is needed — secondary perils historically receive less attention than primary perils, likely resulting in underestimates of the actual risk of catastrophe. 

And even though it’s a secondary peril, Swiss Re reports it affects an estimated 2.2 billion people around the world, more than any other peril. Swiss Re says flood risk assessment needs to be more rigorous. 

The report suggests ways to mitigate flood risk and build resilience.  

“Climate and water are not the only drivers of flood losses. Exposure levels, urbanisation, existing flood defences and the efficiency of sewage systems, emergency response mechanisms and many other factors all shape the physical and financial loss outcomes of flood events.”  

 Feature image by iStock.com/Dmitrii_Guzhanin