Climate change has triggered changes in weather patterns such as more frequent and severe natural disasters. Some natural perils, such as hurricanes, cyclones, and earthquakes, are broadly restricted by the location of where they impact. However other ’secondary perils‘ such as floods, hail, storms, tornadoes, and wildfires, can occur anywhere in the world, and their impact can be devastating to lives, property and the environment.
The increase in incidence of secondary perils, in particular, has seen rising losses for insurance companies. This has resulted in reduced insurer risk appetite, as well as a potential decline in their capacity to insure against future catastrophes.
Primary natural perils have been studied and modelled for many years and are a risk where insurers’ modelling for exposure is relatively balanced; resulting in a more limited appetite for locations with greatest exposure. Insurer understanding of secondary perils, however, is still developing as studies continue on the impact of climate change and of cyclical global climate variations such as El Niño and La Niña. Their combined effects on the natural perils and locations has seen both greater regularity and severity of loss.
In turn, this has evoked a reduction in appetite for risks located where they are prone to these exposures. This appetite limitation is primarily apparent at treaty purchasing level and passed down to insurers to apply on policies. The limitation can take the form of reduced limits, increased costs for capacity – or both!
Consequently, businesses operating in those regions have faced a reduction in insurance options available. This has led to higher insurance premiums or even the inability to obtain coverage altogether for certain perils.
For construction risks, this is particularly challenging. With projects typically requiring multi-year policies (covering multiple weather seasons and treaty renewals) a long-term commitment of capacity is required to mirror contract conditions. Further, as construction risks often carry an increased exposure until structural and weather protection works are completed,, risks are increased in such regions, for both insured parties and insurers.
It is crucial for insurers to carefully assess the risks and costs associated with providing coverage in NatCat areas, to ensure that they can manage their exposure to these risks whilst providing affordable and adequate coverage for their policyholders.
Similarly, it is worth considering these risks from a contractual perspective on projects located in such regions. Risk sharing and management mechanisms can consider the potential project impact, as well as establishing alternative arrangement for risk sharing, management, and residual risk transfer, which could all bring benefits to the project.
A well-structured and clear underwriting submission drafted in good time, is key to conducting successful discussions with insurers. Focus should be on mitigation plans designed to reduce the likelihood and severity of potential disasters or to minimise the potential for damage to property and loss of life should a disaster occur. Early engagement is key to ensure as many avenues as possible for effective solutions can be investigated, rather than having to work through already locked-in contracts.
