SCS losses escalate-but insurers can manage the risk: Holborn

Escalating losses caused by severe convective storms (SCS) are a growing worry for insurers—especially in North America—concerned that elevated losses are a new norm. While there is no silver bullet, there are things insurers can do to manage this risk—while also using some “good, age-old insurance wisdom”.

That is the view of Dan Zitelli, co-head of catastrophe modelling at broker Holborn, who is heavily involved in helping clients understand this risk. “This is a concern for virtually every one of our clients,” he said. 

“They have seen elevated loss levels for several years. The questions are: is this the new normal, and what is causing it? Is it climate change? Is the peril itself changing? The problem is, there is so little detailed historic data available, and the traditional risk models are not adequate for assessing this risk.”

For context, in the first half of 2024 insured losses from natural catastrophes globally reached $60 billion, according to the Swiss Re Institute. SCS, mainly in the US, accounted for 7 percent of these losses: some $42 billion globally in the first half of 2024. In the US, 12 storms each caused losses of $1 billion or more. Insured losses from SCS in the US have increased by around 8 percent in nominal terms annually since 2008.

Zitelli said that clients’ concerns have been escalating since 2021, with SCS causing unexpected and concerning losses in 2022 and 2023, and the trend has continued in the first half of 2024. He stresses that the causes are unclear but he thinks the inflation of recent years has escalated claims costs; higher population density is another factor. 

“The impact of climate change is unclear, but the Earth has a closed energy system. If you’re adding more energy into the system, that will have an effect.”

The challenge, Zitelli stressed, is the lack of data. “There is maybe 20 years or so of data-rich information about SCS perils, but that is not enough. If you look at different breakdowns in those years, you can’t find a trend. Is climate change having an impact on the SCS peril? No-one has the data to support that.”

Taking action

There is plenty insurers can do to manage this risk better—and absorb any claims, says Zitelli. They should consider solutions on the basis that, regardless of the drivers, losses stemming from SCS-related claims remain high.

The first step is simply to look more closely at pricing. “Are you charging enough to balance the increased claims? Is there enough premium on the books? These are core questions,” he said. 

“Looking at premium adequacy for clients is part of our role nowadays—considering the potential risks and assessing expenses, reinsurance and everything else. But ultimately, you need to ensure the premium is enough.” 

Closely linked to this are underwriting guidelines and ensuring that agents are following them. Zitelli said he has seen insurers replace agents who do not follow guidelines appropriately. “We are seeing clients take tough steps to get their risk management for the SCS peril under control, so they feel comfortable. Underwriting is a piece of that puzzle; pricing is the other.” 

Another big part of the solution will be clients’ reinsurance programmes. In what is broadly regarded as a hard market, this is another area where Holborn can offer true value. Zitelli said the broker spends time looking closely at historical experience versus current exposures, combining that to create an appropriate reinsurance structure that works for each client.

The solution could be even more radical, he added. “Some clients are changing their strategies—they are pulling away from certain risks, certain lines of business. Some are withdrawing from whole states.”

Zitelli acknowledges there is often a tension between a price that is competitive enough to result in adequate business and market share and a price adequate to cover the risk. Marketing executives and actuaries are typically on opposite sides of this equation.

"There is no easy solution to this, but a good broker will provide the tools and information so a client can make the most informed strategic decision,” he admitted.

“We view our role as an advisor, a resource, a party that has an aligned interest. We have a close interest in the success of our clients, but we’re not running their companies. 

“No-one can predict the future, but the best way to be prepared for it is with knowledge and looking at the past. Sometimes, the oldest solutions are the best: managing accumulations, making sure you don’t have concentrations beyond what your risk profile is able to accept. 

“That’s just age-old insurance wisdom, and it still means a lot today.” 

Dan Zitelli is co-head of catastrophe analytics at Holborn. He can be contacted at: danielz@holborn.com 

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