Secondary Perils Pose Growing Hazard for Catastrophe Bond Investors as Climate Change Increases Frequency

Based on the information provided, it seems that the rising trend of secondary perils, such as wildfires, floods, and thunderstorms, poses a growing hazard for investors in catastrophe bonds and other insurance-linked securities, as these events are becoming more frequent due to climate change. While these securities have generated strong returns in the past, the risk models underlying them are being challenged by this new breed of risk, as they underestimate losses from secondary perils. Some investors, such as Elementum Advisors LLC, have had to refine their models to better account for these risks, while others caution that models still need to incorporate data on population density, property values, and insurance deductibles and premiums in order to accurately assess the likelihood of a bad storm affecting insured buildings. As secondary perils continue to pose a challenge, experts suggest that investing in these securities requires serious time and resources devoted to understanding the dynamics of these risks, particularly as climate change further alters the landscape of severe thunderstorms in the US. Overall, the increasing prevalence of secondary perils highlights the need for “more advanced physical-modeling techniques,” according to Karen Clark, CEO of Karen Clark & Co., who notes that each sub-peril associated with these events must be modeled separately for each event and then losses combined appropriately.