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Building Flood Resilience: A Role for Re/insurers in a Wetter World

Sandbags Outside House On Flooded Road

Insurers can take steps including viewing flood as a primary peril, writes Jason Richards, CEO of UK & I for Swiss Re.

Floods are becoming a greater threat. The data is irrefutable.

The good news is that flood risk is, and will remain, insurable.

Flood affects more people around the world than any other peril. Losses have been on an upward trend globally in recent years, with cumulative insured losses between 2011 and 2020 standing at nearly USD 80 billion — almost double that of the previous decade. Last year alone, our research shows, floods accounted for 31% of global economic losses from natural catastrophes, which stood at USD 82 billion.

The UK is not exempt from this trend. In fact, six of the 10 wettest years since 1862 have been since 1998, and the last decade was on average 4% wetter than 1981–2010, according to Swiss Re sigma. Moreover, The Met Office predicts that a record-breaking UK rainfall event such as in October 2020, which included the wettest day ever, could repeat every 30 years by the end of the current century.

The good news is that flood risk is, and will remain, insurable. However, the growing frequency and scale of losses reinforce an urgent need to extend the reach of risk transfer solutions and strengthen resilience of businesses and communities across the country.

There are three key ways to achieve this:

Look at Flood Through the Same Lens as Primary Perils

For insurers, the first step to boosting resilience against flood risk is to afford it the same attention as primary perils, such as hurricanes, when it comes to the analysis of claims and exposure data.

Flood is an undeniably complex peril to model. But risk maps are becoming increasingly more sophisticated, while probabilistic risk models are also improving. For example, flooding is now part of a tropical cyclone model which can explicitly simulate events like Hurricane Ida in 2021. Many such models use open-source frameworks, which can help close any UK model gaps more rapidly.

Swiss Re offers a range of proprietary geo risk tools that provide swift overviews and assessments of natural hazard exposures worldwide. For instance, clients can look at perils such as floods or earthquakes at the highest level of granularity and use the exposure information for their own underwriting, costing and decision-making.

The growing frequency and scale of losses reinforce an urgent need to extend the reach of risk transfer solutions and strengthen resilience of businesses and communities across the country.

Making greater use of such tools and employing the multitude of high-quality and high-resolution data is helping our own clients further increase their understanding of flood risk, in turn improving the accuracy of costing.

At the same time, moving away from using past loss experience as a proxy for present-day risks, and instead seeking to calibrate models to the evolving risk, is helping insurers to minimise surprise losses and draw upon new insights and scientific evidence when repricing risks.

Over time, this will help facilitate sustainable risk transfer product offerings for flood exposures, as well as for instances where flood is a secondary outcome of a primary peril event, such as in the case of tropical cyclones.

Closing the Flood Infrastructure Gap

Developed societies have plenty of flood protection measures, but these are typically what is termed ‘grey infrastructure’: levees, dams, retention basins, flood barriers and drainage systems that were often built more than 50 years ago. They are no longer up to the job — especially as the job is getting harder.

What we need now are integrated flood risk management solutions. These are new, nature-based or green infrastructure projects aimed at reducing flood risk by enhancing infiltration, while also supporting sustainability.

Just across the North Sea lie some poster-child examples of this in action. The Delta Programme in the Netherlands combines grey infrastructure like dikes with green measures such as creating and using lakes and parks as extra water storage space in times of high river discharge. Further south, Belgium’s Sigma Plan is intended to handle the flood risk of more than 20,000 hectares of land with the restoration of around 3,000 ha of natural habitat by 2030.

As long-term investors, re/insurers are ideally placed to fund new projects such as these. From a commercial perspective, they also give rise to new underwriting prospects. Insurers can be important partners through the entire lifecycle of these projects — from standard property insurance to new risk pool opportunities.

Closing the Flood Protection Gap

Despite the knowledge that flooding can inflict heavy losses, our research finds that 83% of the global economic losses from flood events over the past 10 years were uninsured.

Ensuring that flood insurance becomes more widely available and affordable, while also offering incentives for risk reduction, will be absolutely essential to building future economic and social resilience to flood risk.

National property insurance flood programmes involving the public and private sectors are a key way of making this happen. Take the UK’s Flood Re scheme, for instance, which has been operating successfully since 2016 to ensure homes can continue to access affordable flood insurance. Flood Re recently launched an initiative with its insurers to cover up to GBP 10,000 towards measures to make homes more flood-resilient as part of the claims process after a flood. This is a fundamental change to how home insurance works — from both a process and culture perspective — to move beyond simply returning a home to its previous state. At Swiss Re, we are proud to have been the co-lead reinsurer on the Flood Re programme since its inception in April 2016.

Bundling flood insurance together with cover for other perils, rather than offering it purely as a standalone product, can also help increase pick-up rates and go some way to closing the protection gap. Aside from reappraising the way existing solutions are packaged and sold, there are other innovative flood insurance solutions to be explored. Traditional indemnity flood cover is one. Micro-insurance, insurance-linked securities and parametric reinsurance are others. The latter pays out when rainfall exceeds certain levels that in turn can lead to severe flooding, helping governments cover the cost of emergency relief.

Managing the ubiquitous risk that is flood will be no mean feat. But with due attention on different fronts, re/insurers are uniquely placed to be the primary agents of economic and social resilience.

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