3 ways Canadian P&C insurers can better protect against NatCat risk

Staying on top of risk accumulation in real time, making more use of policy sublimits and deductibles to differentiate risk, and conducting segmented data analyses are three ways for P&C insurers to keep up with the rapid rise of secondary perils in Canada, a Swiss Re report says.

Secondary perils in Canada such as floods, wildfires and hailstorms accounted for 90% of natural catastrophe losses last year, as Swiss Re notes. But while earthquake and hurricane modelling have kept pace with key loss drivers like inflation, urbanization and climate change, secondary peril modelling has been more challenging, says the reinsurer. And that comes at a time when secondary perils are causing more natural catastrophes than ever before.

“If you look across the past 10 years, Canada had nine secondary peril losses greater than $1 billion (adjusted for inflation),” says the Swiss Re report, authored by Jolee Crosby, Swiss Re’s CEO of Reinsurance Canada and Caribbean. “Essentially, the industry should expect a billion-dollar Cat loss every year. In addition, 2022, 2023 and 2024 were among Canada’s largest insured natural catastrophe loss years, which illustrates the upward trend of Cat frequency and severity.”

How can insurers continue to make their product affordable as their NatCat losses mount?

Three ways, Crosby’s blog states:

Managing risk accumulations

Suddenly writing a lot of business in one area can be a sign of great business success. But it can also be a sign an insurer’s pricing is out of whack — with the result being the insurer has taken on too much secondary peril exposure.

Pay attention to accumulating exposures at a granular level, segmenting exposures by various levels, including municipalities, postal codes or post office forward sortation areas (FSAs), Swiss Re advises primary insurers.  

One way to track accumulation exposure in real time is to be aware of what the competition is doing, Swiss Re says.

“First, its peers may have adjusted product features such as price increases that could lead to a higher take-up rate for [the insurer’s] own portfolio,” the Swiss Re report states. “Peers may have also adjusted deductibles and coverage (e.g. excluding or sublimiting flood).

“This may signal that a carrier should adjust its own underwriting controls for pricing, coverage and new business if the accumulation risk is growing too rapidly.”

Sublimits and differentiated deductibles

Premiums are not the only way to adjust for secondary perils risks, Swiss re observes.

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“In Canada, insurers have the flexibility to set deductibles by peril, but this is not yet widely practiced – even as secondary peril risks increase in frequency and intensity,” Swiss Re observes.

“When every policyholder is offered the same flood deductible regardless of their exposure, the opportunity to differentiate is lost. For example, while all basements are flood-prone, a simple concrete-finished basement presents far less risk than one outfitted with high-end electronics. Basements with high-end electronics and equipment can have a 25% higher risk than those without.

“In such cases, differentiated deductibles can better align with the actual risk.”

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Plus, sublimits and deductibles can be used to reward consumer initiatives to reduce their risk, particularly in high-risk areas.

“To manage exposure and improve affordability for consumers, insurers may apply sublimits,” Swiss Re’s report states. “For example, a home located in a hail-prone zone with standard asphalt shingles may be subject to a lower sublimit than one equipped with hail-resistant roofing. These strategies allow insurers to balance risk with accessibility, ensuring coverage remains economically viable in increasingly volatile environments.”

Data drives strategy

Insurers must be sure to capture the data they need to segment risks, Swiss Re says.

“For example, while it’s well known that certain roof types are more susceptible to wildfire, insurers can’t analyze this risk if information on roof type isn’t collected at the underwriting stage,” Crosby writes. “Without this data, it becomes difficult to identify trends or make informed decisions.”

The reinsurer also observes insurers sometimes use overly broad categories to measure risks, such as “good, average or poor.” But the more granular the data, the more tailored and effective the underwriting can be.

“Imagine segmenting a portfolio into 10 distinct categories, each with its own differentiated strategy, Swiss Re’s report states. “Now, imagine having 10 categories per peril each having different approaches.

“This level of precision not only enhances risk management but also sets an insurer apart from its peers by demonstrating a deeper understanding of risk and a commitment to customized solutions. This also leads to better profitability for the insurer.”    

David Gambrill

David has twice served as Canadian Underwriter’s senior editor, both from 2005 to 2012, and again from 2017 to the present.