Flood insurance: the use of new tools and more dialogue with the government are conditions for creating a more efficient market, research by Swiss Re reveals

A survey of over 100 professionals from various insurers found that the sector is willing to adopt solutions to reduce the impact of natural catastrophes provided it has the appropriate tools and that there is State involvement and greater awareness among the population.

The rising trend in the frequency and severity of floods presents major challenges to the insurance market. The main challenge is to solve the problem of providing coverage for the entire population, including those who are most vulnerable. But will the sector be prepared to meet this challenge? This question and others were put to a group representing the Brazilian insurance market, comprising over 100 professionals from various insurers, who attended the “Responding to the challenge of natural catastrophes in Brazil” seminar, organized by Swiss Re on September 10, in São Paulo.

Using special voting keypad devices, the attendees responded to nine questions during the four sessions and viewed the results in real time. According to Florian Kummer, Property and Casualty Reinsurance Underwriting Manager for Latin America, the representativeness of the research, which involved a significant proportion of the insurers making up the market, and the credibility of the replies (most of which were almost unanimous), define more than the current situation. “My interpretation is that I can detect a lot of interest and willingness by the market in offering solutions that benefit society,” he said.


The research showed that, for companies, exposure to flooding risk may cause a higher accumulation of losses in a single event. This item was chosen in 54% of cases, followed by man-made disasters and wind storms (both 20%). 

However, one question in particular revealed a disconcerting fact. Asked whether the insurance industry has the necessary tools in place to adequately assess and price natural catastrophe risks, 90% replied “currently, no”. Kummer wasn't surprised by the result: “Flooding is an everyday occurrence and the insurance sector is not prepared for it.”

According to the research, three-quarters of the professionals surveyed acknowledge that the monitoring and control of risk accumulation in the Brazilian market is “weak”. After five years of strong growth, it's time that the companies improved the control of their exposure to natural catastrophes said Charles Lutz, Senior Property Underwriter. “The new capital regulations and the possibility to reduce the reinsurance cost should encourage investment in new information systems, tools and models,” he said. However, they acknowledge that the largest obstacle for creating an efficient insurance market for flood insurance is the anti-selection inherent in the product.


Since new distribution channels could be used in order to increase the penetration of flood coverage in home insurance and for small- and medium-sized enterprises, the research addressed this question. Asked to choose which were the challenges for improving the use of new distribution channels as a means to grow the market, 23% opted for “lack of consumer awareness”, 5% chose “price”, and 2% selected “complex, unattractive products”. Nevertheless, the fourth option “all these options” was chosen in 70% of cases.

For Swiss Re, the overall findings of the research strengthen the consensus that the insurance industry needs to improve its product offering. It's also evident that the first solution involves determining a fair price for the coverage. Lutz said that anti-selection can only be removed by using risk maps and tools. “Without a tool to quantify and price risk, there will be a single price for all, and only those who are most exposed will buy the product. Using a tool to differentiate prices is essential for creating a risk community and obtaining the critical mass required so that the coverage can be financially viable,” he said.  

In this regard, he highlighted the tool developed by Swiss Re (the only one available in the country), which generates new flood risk maps by zip code. “This tool could be used for creating a flood insurance product, which would benefit Brazilian society greatly,” he said. One of the conditions for making the product more attractive would be the creation of a new regulatory framework. The survey showed that the insurers would be willing to work with the government on this project. Asked on the best way to promote dialogue between the government and the market, most respondents (78%) chose “create a working group comprising insurers and reinsurers to dialogue directly with the regulator and associations, in order for the regulator to amend the current legislation”. The second option, “work directly with the government to try and amend the current regulatory framework,” received 17% of the votes.

Our assessment is that this result is a very strong sign that the insurance industry wants to act proactively instead of waiting for tragedies to occur before acting. The respondents also considered which options are most appropriate to the Brazilian market for discussion between the working group and the government. In this regard, opinions were divided: 55% believe that the government should subsidize part of the insurance premium, while the private sector should work on new products and develop the market. For 37%, natural catastrophe coverage should be obligatory and the insurance companies should change in order to work in this new market. Only 8% believe that the government shouldn't encourage any type of natural catastrophe coverage since they consider this to be the exclusive responsibility of the private sector.

High demand

Kummer believes that there's high demand for flood insurance. In his opinion, dialogue between the insurance industry and the government, together with new tools and distribution channels, would enable insurers to offer attractive solutions to the Brazilian market. “The insurance sector has the responsibility to help the government in disaster management,” he said. He added that the creation of an efficient flood insurance market would resolve a serious social problem, which can be summarized in one question: “Currently, in the absence of a strong insurance market, who pays the bill?”

It's the opinion of Swiss Re that the emergence of an efficient market would help to make Brazilian society more resilient to natural catastrophes and to reduce the burden on households, businesses and the government. To this end, Swiss Re, which is a global leader in working with governments to mitigate major risks and in supplying financing in the event of disasters, is at the disposal of the Brazilian insurance market and the public authorities in this country.

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