Best’s Special Report: Secondary Perils Continue to Spike Insurer Loss Ratios, Even in Less Catastrophe-Prone States

AM Best data shows that nearly half of all U.S. states saw its highest single-year property catastrophe loss ratio in the last 10 years exceed its 10-year median loss ratio by more than 20 percentage points. While many of these states are prone to catastrophe losses, according to a new AM Best report, the rising frequency of secondary perils in states considered to be less-catastrophe prone have led insurers to ramp up reassessments of their pricing models, underwriting strategies and risk management approaches.

Secondary perils have become a major cause of loss in the past five years for U.S. property/casualty insurers with property catastrophe-exposed lines of business, highlighted by the January wildfires in California. In its Best’s Special Report, “US Weather Event Risks Highlight Need for Stress Testing,” AM Best states that insurers will need to stress test for these threats regularly as risk profiles evolve. Stress tests are conducted and factored in AM Best’s credit rating process, as part of the balance sheet and enterprise risk management assessments.

“Stress testing should consider risk appetite and tolerance, as well as net exposure, the impact from multiple events, liquidity and reinsurance structure and dependence,” said Jason Hopper, associate director, Industry Research and Analytics. “Understanding true exposures and considering all plausible scenarios is important. With the availability of aggregate reinsurance protection limited, some carriers have been severely impacted by the aggregation effects of multiple, smaller events.”

The report notes that there were 27 one-billion-dollar weather events in 2024, and 28 in 2023 (despite there being no NOAA-named hurricane), compared with an average of 15 events in 2010-2022. While national insurers have accounted for an overwhelming majority of direct losses paid, single-state and regional companies tend to have a greater share of claims compared with their premiums in some states, with Kentucky being the highest in 2023 at nearly 25% of direct losses paid in the state while having 18% in market share based on direct premiums. The greater share of claims than premiums indicates higher concentration risk for these carriers.

“Market disruptions continue as some of the national carriers curb their risk appetites, creating opportunities for single-state and regional writers,” said Jacob Conner, associate analyst, AM Best. “However, the operating loss-drag on capital and surplus over the last 10 years has been worse for single-state and regional writers in catastrophe-prone states, and so stress testing helps companies determine the strength of the balance sheet and ability to absorb shocks.”

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=353292.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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The rising frequency of secondary perils in states considered to be less-catastrophe prone have led insurers to ramp up reassessments of their pricing models, underwriting strategies and risk management approaches.