By Isha Marathe

March 13 - (The Insurer) - As the frequency and severity of “so-called” secondary perils spike and public markets become increasingly unforgiving to earnings volatility, (re)insurers have to be more transparent about risks to their investors, said a panel of executives and regulators at the Bermuda Risk Summit 2025.

While identifying the difference between primary and secondary perils, Christian Dunleavy, group president and CEO of Aspen Bermuda Limited, referred to major or primary perils as “capital events” for (re)insurers and secondary or minor perils as “earnings events” for companies.

“I think from a major event scenario, the industry has performed pretty well in rebuilding balance sheets and having a lot of capital strength there,” Dunleavy said.

“Where the industry has not done well is covering its cost of secondary (perils)... and that I think became an accumulated issue that ultimately resulted in as much of a change in the cat market in 2023 as the size of an individual event itself,” he added.

In an effort to address retention levels and execute on more disciplined underwriting strategies by moving away from primary perils risks, many insurers may have ended up inadvertently “sleepwalking” into an accumulation of these secondary perils, he said.

Secondary perils are more likely to build than to slow down, making them especially difficult to model as they tend to be localized events, leading to a scenario where extracting the volatility from a portfolio is increasingly challenging, he added.

As a result, investors faced a prolonged period where the cost of capital wasn’t being serviced and the returns from the industry “just weren’t there,” Dunleavy said.

But as they become more attuned to the inflationary impacts of these increases in exposed values, insurers will have to change tactics to provide as much transparency as the uncertain nature of these perils allows.

'SURPRISE' PERILS

Steven Moss, investor analytics at Aeolus and deputy chair of the climate committee at the Association of Bermuda Insurers and Reinsurers, said that “any peril can become a peak peril if you get that overlay of exposure with the risk and the hazard that sits on top of it, anything can reach an extreme level far enough out of the tail.”

This mercurial nature of a secondary peril quickly snowballing into something that may come as a “surprise” to investors is the challenge.

For example, the losses from the 2025 California wildfires came as a surprise to investors in the insurance and reinsurance industry, he noted.

“We as an industry need to be very clear (because) that is a false segregation, to some extent,” Moss said. “(Because) the reinsurance industry is there to cover the ‘capital events,’ and any event can become a capital event if it becomes big enough.”

The danger of allowing additional perils to show up as surprises in investor contracts or portfolios is what led to the pre-2020 “mass exodus” of capital from the insurance industry, Moss said.

“(Investors) get very, very suspicious when they start to see (the) bleeding of additional perils (and) attachment points starting to slink down (in) contracts.”

Indeed, 2024 was the ninth consecutive year where global economic losses exceeded $300 billion, and the sixth-costliest year on record for insurers at $145 billion, with 2025 off to a shaky start from the California wildfires, said Jeffrey Manson, senior vice president, underwriting, head of global public sector partnership at RenaissanceRe.

Until climate volatility can be adequately expressed in loss cost ratios, Moss at Aeolus said the industry should work to better differentiate the language around perils altogether.

“Rather than trying to classify these things as secondary versus primary in terms of the actual peril (focus on) ‘what’s their contribution to your expected loss? What's their contribution to your average loss on an annual basis? And that's how you should think about the segregation?’”

Since the impact of climate is difficult to gauge over the 12-month period that insurance and reinsurance policies are written over, however, the trends are easier to analyse over the long term.

“When we (are) raising capital… we have to sit down with a potential investor and tell them, what do we think the market looks like, what our portfolios look like, what do you think the margin looks like?” Moss continued.

“This isn’t ‘you just put money in and then leave it there for 10 years.'"

TRANSPARENCY EXTENDS TO REGULATORS AND POLICYHOLDERS

If keeping investors in the loop is integral to drawing in and maintaining capital, keeping policyholders and regulators in the loop is integral to keeping costs low, the panel said.

But insurers are uniquely positioned to understand the underlying risk and match it with capital, he said, “and collaborating with regulators is such an important element of it.”

For instance, RenaissanceRe's Manson said that while the January wildfires were devastating, rebuilding Los Angeles “is a once-in-a-lifetime opportunity” to incorporate new building codes, materials, and architecture that match the evolving catastrophe landscape.

Data from wildfire, hurricane and earthquake modeling from available tools isn’t just helpful for insurers but could be worth sharing with clients, Moss said.

Moss at Aeolus suggested talking to policyholders about the impact of types of mitigation on their technical rate improvement in locations they want to build in, or answer questions about like ‘putting a new roof (under a) fortified standard is going to cost $40,000 how many years is it going to take me to earn that back? How much value is that going to add to my property?’”

“So (policyholders) can make that informed decision of going down the route in one direction or taking their chances and not going down that route,” Moss said.

“But I think we as an industry, need to be very, very transparent around what are we expecting from the policyholder and what tools policyholders have (that allow them) to improve their potential outcomes after a major event.”