Secondary perils deserve a second look

The last several years have demonstrated the increasing financial impacts of secondary perils; floods from Hurricane Harvey and wildfires throughout the West have ravaged individuals, businesses and governments to the tune of several billion dollars. In 2017, insurers reported $22 billion in hail losses in the United States – the highest amount in any calendar year. Many factors are driving the increasing financial impact of secondary perils, including climate change (particularly with regard to wildfire), increasing valuation and continuing development in medium and high hazard areas.

According to the Swiss Re Institute's annual sigma review of natural catastrophes and man-made disasters, secondary perils caused more than 60 percent of insured natural catastrophe losses in 2018. They were the primary loss drivers once more in 2019. And, again, in the second half of 2020, secondary perils caused the most catastrophe losses.

The last three years have proven that secondary perils can be large loss drivers. They are happening more frequently; their severity is increasing, and they are becoming costlier each year.
Megan Linkin, Senior Parametric Nat Cat Underwriter, Swiss Re Corporate Solutions

Hailstorms in the Midwest

Hailstorms are most frequent in the Southern and Central Plains states (the Midwest region in the U.S.) where warm moist air from the Gulf of Mexico and cold dry air from Canada collide, thereby spawning violent thunderstorms. These severe thunderstorms, which produce large hail and long-track tornadoes, commonly occur in the spring and early summer, from April until June.

Hail-related insured losses between 2000 and 2019 averaged between $8 billion to $14 billion a year, according to Aon. There were 5,396 major hailstorms in 2019, according to the NOAA's Severe Storms database.

"We have seen severe thunderstorm losses, often accompanied by hail, trending up," says Linkin. "However, I would rather attribute the increase in hail-related losses to more densely populated areas, with more structures at risk for hail damage. And to the rising cost of repairs."

Innovative new solutions

Similar to natural catastrophe insurance overall, there is also a large and widening insurance gap for secondary perils. In 2018, globally only 50% of economic losses from secondary perils were insured.

Businesses exposed to hail specifically often face gaps in coverage in their traditional insurance policies. One way to avoid these gaps is to complement traditional programs with parametric insurance to provide extra cover.

Maximum Hail Size (inches)

Payout (% of Limit)

1.25 – 1.49


1.50 – 1.74


1.75 – 2.0




Parametric insurance is event-driven and works based on pre-agreed triggers or parameters. With hail, its size at the policyholder's location (defined by a latitude/longitude coordinate) is the pre-agreed trigger parameter. So, the policy is triggered if the hail reaches or exceeds a certain size, and the payout follows a simple formula based on the trigger.

The benefits of this approach are two-fold. First, being independent of any underlying physical assets, parametric insurance offers greater flexibility in the use of funds. Second, the loss settlement is transparent, and payouts are fast, giving the insured access to liquidity when it is most needed and helping businesses to get back on their feet quickly."Parametric insurance is gaining traction because it's a data-driven solution that is able to respond to specific customer pain points more efficiently than its traditional counterpart," says Linkin.

With HAIL, we have access to independent third-party data that provides the location-specific granularity we require for such products.
Megan Linkin, Senior Parametric Nat Cat Underwriter, Swiss Re Corporate Solutions

The current environment of a hardening insurance market has brought on rate increases and capacity constraints, especially for natural catastrophe risks. At the same time, corporations are operating in a time of unprecedented uncertainty and budget limitations. This situation forces risk managers to rethink their retention strategies and consider more structured insurance solutions.

Linkin concludes, "In the context of COVID-19, global economic uncertainty and an unusually active hurricane season, our risk awareness is at an all-time high. Risk managers are seeking new ways and products that respond to their risks faster and fit into their overall risk strategies better."