Addressing secondary perils, regulatory environments, and casualty cycles with US reinsurers

“Calendar 2024 has already exceeded 2023 in terms of events and loss dollars from secondary perils, yet it’s not being discussed,” said Wade Gulbransen, chief executive officer of Howden Re’s North America division, highlighting a continued trend in the US reinsurance market. 

Secondary perils—wildfires, floods, and severe storms—have significantly impacting the market this year. These secondary perils, once considered “non-peak” risks compared to major catastrophes such as hurricanes or earthquakes, have quietly placed increasing pressure on US insurers. 

“Much of that is being retained by insurance companies today, versus shared with the reinsurance market,” Gulbransen explained. Despite the growing frequency and severity of these events, reinsurers have adjusted portfolios, moving away from covering smaller, high-frequency losses. 

“Gone are the days of having the aggregate coverage that we placed in 2017,” he noted, referring to the broader low event deductible protection reinsurers used to offer. 

This shift began in 2017 when insurers made changes to attract capital and stabilise their portfolios. “Reinsurers shifted their portfolios. They moved away from some of the secondary perils and, through that process, created a portfolio more attractive to investors,” said Gulbransen. 

As a result, the responsibility for managing these small-to-mid-sized, frequent losses has largely fallen back on primary insurers, who are now rethinking how to manage these increased retentions. 

“Insurance companies are struggling with the increased frequency of secondary perils and how to appropriately price and manage them,” he added. 

Insurers are increasingly focusing on managing mid-sized losses which, while smaller in scale, can quickly accumulate and have a significant impact on profitability. 

“One approach we’ve suggested is to focus on covering the frequency of mid-sized losses rather than the increased frequency of all loss sizes within their retentions as insurers search for strategies to handle these exposures without eroding profitability,” he explained. 

“Appropriately communicating underwriting strategy is a central component for success.”

A complex picture

The casualty market is currently a key theme, with increasing focus from reinsurers. The industry is working together to better forecast, underwrite, and price exposures, as well as managing insurance company portfolios. 

“We are seeing a push towards implementing a data-driven approach to appropriately understand future strategies, including limit attachment point strategies, as well as re-evaluating business, state, and industry mixes. 

“Appropriately communicating underwriting strategy is a central component for success,” Gulbransen said.

Across the board, there is a focus on ensuring rate adequacy in excess of loss trends. “We have seen rates increase significantly in recent years, and a lot of work has been done on casualty portfolios across the board. We feel comfortable with where we are in the market going forward,” he said. 

“There has been some development in prior years, but we are at an inflection point, where a number of companies are looking to expand market share,” he added. 

State affairs

Beyond the challenges of secondary perils and understanding casualty risks, regulatory environments in key states such as California and Florida are presenting additional obstacles. “In the past, people would have put Florida as the number one most challenging regulatory environment. Now it’s California,” Gulbransen said. 

California’s wildfire exposure is a particular concern, with high demand for capacity to manage these risks. “Wildfire exposures in California have caused a high level of losses, and that’s where there is the largest demand for capacity.” 

While the excess and surplus (E&S) market has provided some relief, the overall environment remains difficult. “The property market on the E&S side is probably healthier than the admitted homeowners’ market,” he said. However, the overall environment in California remains difficult for insurers. 

Turning to Florida, Gulbransen acknowledges that recent regulatory changes have helped improve the market, but challenges persist. 

“The market has improved. It wouldn’t surprise me if a few other startups come in,” he said, although he remains cautious about the long-term impact of these changes. 

“Considering the policy changes and the view of where rates are in Florida, many feel pretty bullish on the state, and there’s more confidence that changes which have taken place are here to stay,” he added. Still, Florida continues to present risks, particularly around fraud and the long-term implications of policy adjustments.

The way ahead

Looking ahead, Gulbransen believes innovation and analytics will be key to helping the industry navigate these challenges. “We’ve spent more than a decade thinking about secondary perils, with our analytics on secondary perils taking off after 2010,” he said, highlighting Howden’s focus on providing custom solutions to clients facing increasingly frequent and severe risks. 

At the core of this forward-thinking approach is the drive to “evaluate how we think about perils and how to best structure something that’s innovative, yet sellable”. Gulbransen is optimistic, believing that the industry’s future lies in data-driven, tailored approaches that address both the rising frequency of secondary perils and the long-tail nature of casualty risks. 

“It’s about finding the right balance between managing risk and maintaining profitability,” he concluded.

Wade Gulbransen is the chief executive officer of Howden Re’s North America division. He can be contacted at: wade.gulbransen@howdenre.com 

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