Impact of secondary perils

2023 was characterised by the dominance of ‘secondary’ perils and continued record-setting weather/climate phenomena. For the first time ever, global insured losses topped USD100 billion without a singular event causing more than USD10 billion in losses for the industry. It was also the first year since 2017 in which no event exceeded USD10 billion.

While a devastating tropical cyclone or earthquake (‘primary’ events) will continue to drive the highest individual loss costs, we can no longer dismiss the potential significance of other (‘secondary’) peril occurrences. This is especially true for some insurance companies that now view secondary perils as their major portfolio risk.

This approach is becoming particularly apparent in New Zealand. ‘Flood’ for example is considered a secondary peril that results from a primary peril such as a tropical cyclone. While reinsurers and insurers use computer models to assess the potential impact of primary perils, less modelling work has previously been done on understanding flood risks.

Almost without exception, every insurance policy covering a New Zealand property risk will have its flood risk profile reviewed as it comes up for renewal in 2024. Insurers will have likely reviewed obvious flood prone risks, such as risks on lake shores, but are now looking closely at all risks using data such as council flood mapping. However, this data does not inform if there have been any risk mitigation factors implemented at the specific property.

What this means for our clients

At renewal, it is important to provide an insurer with adequate information on flood risks and possible mitigation taken. Without such information, an insurer may apply a higher excess for Flood, limiting the coverage available or, in extreme cases, excluding cover completely.