BATTEN DOWN THE HATCHES:
SECONDARY PERILS ARE THE ONES TO WATCH
Secondary perils such as storms, hail and flooding are becoming the primary drivers of claims loss, accounting for 67% of normalised losses since 1966, with Gallagher estimating that two thirds of claims^ managed on behalf of clients are attributable to secondary peril events.
- Gallagher estimates that two thirds of its claims are caused by secondary perils.
- Insurers are applying increasingly sophisticated pricing models to the risk profiles of individual properties or postcodes.
- In some cases additional excesses on risk and/or restrictions on cover are being imposed.
- There is an anticipation of further premium increases and restrictions on cover over the next 12–18 months.
An increased frequency of secondary perils means changes to premiums and restrictions explains Gallagher’s Head of Claims Adam Squire.
Unsurprisingly this has resulted in insurers applying increasingly sophisticated pricing models to the risk profiles of individual properties or postcodes, combining data and 3D modelling technology to understand and price risk accordingly. Secondary perils present a degree of complexity in that they can occur almost anywhere, and can also be triggered by human intervention such as in the case of bushfires. Regionalised modelling backed by the ability of insurers to risk-select has increased. In some cases, additional excesses on risk and/or restrictions on cover are being imposed.
There is every indication that the frequency and severity of secondary perils is being driven by climate change and heavy risk exposure in densely populated areas, including state capitals. Put simply, the higher the concentration of assets, the greater the impact of claims.
Looking at 2018 weather events, the Climate Council reported that climate change is increasing the frequency and/or severity of extreme weather events both in Australia and abroad. Its data shows that climate change is causing (among many things) sea levels to rise, which is increasing the risk of coastal flooding during storm surges. Sea levels, temperatures and rainfall intensity are all predicted to rise across parts of Australia over the next few years – events that will impact exposures to storm, flooding and bushfire risk.
Population in coastal and rural regions growing up to 2.3% per year
As the population grows and urbanisation spreads into coastal floodplains, an increasing number of homes and businesses are becoming exposed to secondary perils
Population growth is also having an impact on the volume of losses caused by secondary perils. Australia’s population is now more than 25 million people and counting. And while the majority (64.1%) of the population lives in major cities, we’re seeing both coastal and rural regions – such as the Gold Coast, the Sunshine Coast, Ballarat and Bendigo – grow by up to 2.3% per year. As the population grows and urbanisation spreads into coastal floodplains, an increasing number of homes and businesses are becoming exposed to secondary perils.
With an increased frequency of secondary perils on the horizon and a greater number of properties being built in areas exposed to climate or weather-related risk, the likelihood of premium increases and restrictions on cover over the next 12 to 18 months is growing.
Legislative action could also impact these increases. In July 2019 the Federal Government released draft legislation seeking to extend the protections currently available under the existing unfair contract terms (UCT) regime to insurance contracts. The Insurance Council of Australia (ICA) has warned that, if adopted, the bill will result in higher premiums and exacerbate affordability and accessibility problems in northern Queensland. It could also result in the challenge of flood exclusions, potentially causing high premium increases for people in high flood-risk areas across Australia.
For business owners, risk managers and company directors looking to review their insurance and risk management program in the next quarter, we would recommend contacting your Gallagher risk advisor or account manager early to prepare a detailed case on your potential risk exposure and review your flood, property and business interruption cover ahead of renewal discussions. We would be delighted to provide assistance in these matters.
Head of Claims
T: (02) 9424 1753
M: 0428 305 494
T: (02) 4979 3354
M: 0417 293 290
^excluding motor claims
Super-charged Storms in Australia: the Influence of Climate Change, Climate Council, 2016
Top Five Insured Loss Events Normalised in 2017 Dollars, ICA Data Catalogue
Super-charged storms in Australia: the influence of climate change, Climate Council, 2016
Planning for Australia’s Future Population, Australian Government, 23 September 2019
‘Unfair Contract Laws to be Extended to Insurance Contracts’, Herbert Smith Freehills, 2019
‘ICA seeks two-year transition for unfair contracts changes’, Insurance News, 2 September 2019