Why secondary perils aren’t so secondary any more
When earthquakes and cyclones devastate cities, the resulting headlines often focus on the damages bill from these events. Yet the insured losses from such primary-peril events often pale in comparison to those from secondary perils such as hailstorms, floods, landslides, droughts and bushfires.
Among the big recent examples of secondary-peril incidents is the massive hailstorm that hit Sydney, the NSW Central Coast and South East Queensland in 2018 and left an insurance bill of around $1.3 billion.
“We’re getting more and more attritional claims as a result of poor weather and then we’ve got these peaks from extreme weather-related events such as hail, floods and bushfires,” says Karl Sullivan, the Insurance Council of Australia’s (ICA) General Manager of Policy, Risk and Disaster Planning. “It’s definitely increasing.”
The ICA’s catastrophe-related claims data from the Australian market reveals that the insured losses* of about AUD$5 billion from the nation’s most famous primary-peril event, Cyclone Tracy in 1974, comes in second to a far less prominent secondary-peril event – the 1999 Sydney hailstorm, which cost AUD$5.6 billion.
Kaise Stephan, a Deloitte partner who advises general insurers and reinsurers, notes that there is often additional fallout from primary perils.
“Events like a tsunami or land liquefaction are classified as secondary perils and add to their cost,” he says.
Michael Knight, Vero’s National Claims Relationship Manager, Commercial Property & Specialty Claims, agrees that secondary perils are more significant than primary natural disasters from an insurance perspective, and that two in particular are the biggest area of risk.
“Hail and flood, they're the two biggest ones,” says Knight. “Over the last few years they've been our biggest cause of major losses in the insurance industry, for sure.”
How are clients covered?
For brokers, the key is to ensure that their clients are well informed about risks from secondary perils, and that means ensuring they understand their options.
“While a cyclone itself is covered under a storm event, it’s the flood that’s the big concern for brokers,” says Knight. “Flooding is an opt-in / opt-out arrangement for commercial insurance policies. We’ve got a standard definition of flooding in the insurance industry now following the Brisbane floods, but we still have insurance that is opt-in or opt-out.”
“The problem with opting in is that, depending on where you live it can be expensive to obtain cover,” says Knight. “But in some places, in areas prone to flooding, it’s almost crucial to have it.”
Knight also points to business interruption protection as a critical concern for brokers when discussing business coverage for perils such as these.
“We can repair a building and we can get a commercial premise back to a working order, but it's the impact when the business ceases trading,” says Knight. “The impact that those events have on businesses to recover and get back to pre-event operations and profitability. That’s why business interruption is such a big issue.”
According to Deloitte’s Stephan, using insurance brokers or other qualified industry professionals makes sense to ensure clients have the right product to cover their risks.
“The brokers know what products are out there and what coverage is available, and they can also help assess a business’s risks.”
Sullivan from the ICA advises businesses to rigorously assess their exposure and then make prudent decisions as to whether they insure for those risks or not.
“Typically, the best way to do that is to engage a competent, credible broker who should be familiar with your type of business and who should be able to advise you on the risks you may be exposed to and present you with the options to transfer that risk.”
Brokers can also play a key role in negotiations on behalf of their clients, both in terms of ensuring key covers are included, and in final pricing.
The more complex an enterprise – and the more dependent it is on utilities, transport and service-level agreements that hold businesses accountable for a high level of services to customers – the more it is likely to require professional insurance advice.
“You can spend time studying insurance needs, but we generally find that small business owners don’t have that time to do that,” Sullivan says. “That’s why they need a broker.”
Disclaimer: The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.
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*Figures normalised in 2017 Australian dollars