Impact of Secondary Perils on Insurance: Risks and Innovations

The insurance sector has long emphasized preparing for catastrophic events like major hurricanes and earthquakes, developing specialized capital systems and regulatory frameworks for these large-scale threats. However, recent trends spotlight smaller, more frequent incidents, known as secondary perils, which are having a significant impact on the industry.

In 2025, secondary perils such as severe storms, wildfires, and floods resulted in insured losses of $98 billion, marking a record-breaking year for these events, according to Munich Re. These losses constituted a major portion of the total $108 billion in insured losses from natural disasters that year. Notably, secondary perils have eclipsed primary perils in contributing to overall insured losses for seven consecutive years, establishing a persistent trend.

Despite this shift, the protection gap continues to widen. Swiss Re reported that in 2024, roughly 57% of economic losses from natural catastrophes were uninsured, exceeding $181 billion. The industry's traditional catastrophe models primarily focus on major perils and lack the precision needed to predict secondary events, such as the variable dynamics of wildfires and localized effects of convective storms, which amplify this challenge.

For example, wildfires in Los Angeles in January 2025 resulted in $40 billion in insured losses, highlighting the limitations of conventional models in risk forecasting. This has led to reduced coverage availability, leaving many property owners at financial risk without sufficient insurance protection.

Addressing these challenges requires innovative risk assessment methods. Future models must integrate diverse environmental factors impacting secondary perils, using real-time satellite imagery, detailed environmental data, and advanced machine learning tools. While data and technology are available, the industry must overcome its hesitation to innovate beyond traditional models.

Additionally, business practices must evolve alongside modeling improvements. Emphasis on secondary perils is crucial, along with exploring parametric insurance solutions, which streamline the claims process by basing payouts on predefined physical conditions.

The shift also necessitates attracting and training talent skilled in data science and environmental analysis, moving beyond traditional actuarial methods. Bridging the current protection gap calls for aligning resources with today's risk environment, enabling the industry to provide necessary coverage and support consumers and businesses in navigating the evolving risk landscape.