Climate change pushes secondary perils to the fore: Moody’s

Laurent Marescot, senior director, and Vivek Bajaj head of Continental Europe at Moody’s Insurance Solutions spoke to  Baden-Baden Today.

What is the real difference between a primary and a secondary peril in 2024? Answer: almost anything from a long list of pre-existing local conditions, concurrent weather patterns, prior storm damage, recent resilience measures and much more. Work from the wrong data or miss a correlation and you might miss the tipping point between a non-event and a balance sheet event.

That is the warning which officials at Moody’s Insurance Solutions are bringing to delegates of the reinsurance forum at Baden-Baden in 2024.

“Change one of the key factors behind these perils just a bit and it could make your loss explode,” Laurent Marescot, senior director at Moody’s Insurance Solutions, told Baden-Baden Today. “Many of these processes are non-linear.”

The latest example on Moody’s minds is European floods and what ground saturation can suggest about pending damages well beyond what one might surmise from precipitation levels alone.

Central European floods caused by Storm Boris, which brought heavy rains and powerful winds to parts of Central Europe for several days starting September 11, have likely rendered €2.5 to €3.5 billion in damage, Moody’s has forecast.

The Vb cyclone track, a known peril in the region which develops over the western Mediterranean and moves northeastward, bore precipitation which could match the amount of rain during the devastating 2023 floods in Italy.

Or compare with the European floods in July 2021 driven by low pressure system Bernd: different soil conditions from differing preceding weather patterns meant different results not predicted by precipitation alone.

“Central European flooding this year could have been even more severe if the soil could not cope with that water”—or if the region hadn’t taken the major new steps it took to build resilience after 2002 flooding, Marescot said.

“It’s a key learning for risk managers: you need to focus not just on the warning about precipitation, but what it is landing on and what has come before.”

They are earnings perils

Vivek Bajaj, head of Continental Europe at Moody’s Insurance Solutions, added: “It yet another way that ‘secondary peril’ is a misnomer. These are earnings perils.

“The impact is so massive that it is not fair to call them secondary perils,” Bajaj said, citing a “secondary to primary perils threshold that could come down to any number of pre-existing factors”.

Bajaj offers other potential examples. Drought looks like the secondary peril of the future that is only ever a pre-existing condition away from “primary” status, he said.

“Drought is drought, but drought plus pre-existing soil conditions such as the presence of clay near the surface can lead to subsidence, a form of ground movement rendering property damage.

“This risk is underestimated currently, save arguably in France and Belgium, but the risk will increase quite significantly as a result of climate change.”

Look across the Atlantic and the 2024 hurricane season will teach some very similar lessons: Hurricane Milton brought storm surge to bear on some wealthy Florida property which had been inundated with storm surge from a hurricane landing just weeks earlier, nearly 200 miles to the north.

Not to forget Hurricane Ian in 2022: many properties have not yet been rebuilt, which could reduce potential exposure for Milton’s October 2024 landfall.

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