image of flood app on iPad and publication

Insuring floods: a challenge and an opportunity

Assessing proper flood coverage can be difficult, but it also allows the industry to educate the public about hidden flood risks and making floods insurable. Swiss Re dives deeper into flood risk with the publication Flood - an underestimated risk: inspect, inform, insure.

Flooding affects around 500 million people each year. Losses due to flooding have risen from USD 1-2 billion to 15 billion in just under 40 years. If you live near a river, these aren't just facts and numbers: You already know what floods can do.

But for those who do not have the daily visual reminder of a river, the risks are not as obvious. Take Copenhagen for example: In July 2011 a heavy cloudburst dumped about 160 mm of rain in less than 24 hours, more rain than the city receives in two months. This reminded everyone that high losses can occur outside known river flood risk zones.

All flood events involve one thing, water, but their causes vary. Torrential rainfall, ice jams, dam bursts and more can cause a flood event. As the publication Flood – an underestimated risk: inspect, inform, insure (PDF, 3.6 MB) points out, these variations, along with other factors, make insuring floods difficult - but possible. The keys are risk awareness and common sense.

Spotting hot spots

The Copenhagen cloudburst wasn't the only unexpected flood event in 2011. That same year, Thailand experienced historic rainfall and flooding. USD 12 billion later, the insurance industry realised that the country was an emerging market "hot spot," an area with latent flood loss potential due to extreme losses incurred not just locally, but through supply-chain interruption and other related factors.

Hot spots can be blind spots when assessing flood risk. Swiss Re Global Flood Zones™ (GFZ) examines these areas. GFZ, an enhancement to our hazard atlas CatNet®, helps underwriters develop flood solutions and accurately price risk, while our iPad app provides a rich, interactive introduction to the topic.

Building a broad risk community

A large and varied risk community is an important part of keeping flood insurance affordable. A risk community comprised only of policyholders in high-flood-risk areas isn't viable as this would lead to unaffordable premiums. In turn, home and business owners would forgo flood insurance.

Plans that allow for affordable coverage, such as the recently extended National Flood Insurance Program in the US, are a good start. But policyholders, governments and insurers must continue to work together to ensure principles of insurability are met (see box) and that a broad, and fair, risk community is formed.

Using common sense

Minimising flood risk and keeping floods insurable requires logical decision-making from all parties involved: Governments should implement sound prevention measures, including building codes to help keep flood insurance affordable.

Builders and policyholders should closely examine exactly where they plan to construct homes and businesses, staying clear of areas that are frequently flooded. In addition, incentives should be given for those who choose to relocate to less-flood-prone areas.

Taking all of these factors into account will help make - and keep - floods insurable.

Find out more

Published 6 September 2012

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