SCS can pose a challenge or an opportunity for ILS markets – Acrisure Re

A new report from Acrisure Re argues that Severe convective storms (SCS) are becoming an existential challenge for some regional insurers, according to Acrisure Re.

Meanwhile the peril is simultaneously creating an opportunity at re/insurance level for the insurance-linked securities (ILS) market to expand its use of catastrophe bonds, according to a report from the re/insurance broker.

The study observes that SCS has become a dominant source of insured losses not just for the US but globally.

“Over the past decade, SCS has accounted for half of global insured losses from secondary perils, with hail representing most of those losses,” the authors write.

Losses have escalated rapidly in recent years.

According to the report, aggregate insured losses in the US from SCS reached around $200bn between 2020 and 2024, roughly 2.5 times higher than the preceding five-year period.

Yet the drivers of this growth are not primarily meteorological.

Instead, exposure trends such as population growth, urban expansion and rising asset values are amplifying the financial impact of storms that historically might have produced far smaller insured losses.

The report cites wider industry research supporting this trend.

“Urbanisation in hazard-prone areas, rising asset values and inflation have amplified the financial impact of severe thunderstorms,” according to Swiss Re Institute research referenced in the study.

“As exposure continues to grow and reconstruction becomes more expensive, Swiss Re Institute expects losses from this peril to increase over time.”

The geography of exposure has also evolved.

Historically concentrated in the central United States, tornado and hail activity is now affecting a broader area of the country as development expands across what the report describes as the wider “tornado alley”.

However, the scientific evidence around storm intensity is more nuanced than the loss figures might suggest.

The broker’s report cites academic research showing that the strongest tornadoes are not becoming more frequent.

“In short, our results demonstrate that over the last six decades, (E)F1 tornadoes have a significant upward trend whereas (E)F2, (E)F3, and (E)F4 tornadoes have a significant downward trend, and (E)F5 has a downward trend but not significant,” said the report.

This divergence between hazard intensity and economic impact is placing particular pressure on regional insurers that often carry concentrated exposure to hail and convective storm losses.

Frequent medium-severity events, especially hailstorms, can generate high volumes of claims and produce significant earnings volatility for carriers with limited geographic diversification.

Against that backdrop, the report argues that capital markets could play a larger role in absorbing SCS risk.

While cat bonds have historically focused on peak perils such as US hurricanes and earthquakes, the growing loss profile of secondary perils is prompting greater interest in securitising these risks.

Structures such as indemnity-based or parametric triggers tied to hail or tornado activity could help insurers transfer portions of their exposure to the ILS market.

For investors, diversification benefits may be attractive.

SCS losses tend to be less correlated with the peak catastrophe risks that dominate existing cat bond portfolios.

“Severe convective storms represent a compelling opportunity for catastrophe bonds, offering diversification for investors while providing insurers with an additional tool to manage growing exposure to secondary perils,” the report added.