Flood protection gap
The major hurricanes and flooding in Houston in 2017, as well as other major floods around the world, have heightened awareness of the increasing losses from extreme flooding events.
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Rising temperatures load the atmosphere with more water vapour, leading to more frequent extreme rainfall events during hurricanes and in severe convective storms. In aggregate, inland flood events tend to result in highest water-damage related losses, due to their high frequency. However, the losses from individual storm surge events, which occur less frequently, can be larger.
In addition, population and urbanisation are also extending into flood-prone areas. The ever-expanding area of paved surfaces in urban locations causes more rainwater to run along the surface rather than be absorbed into the ground. This is leading to more extreme and costly flooding when heavy rains fall. For example, the Houston metropolitan area has expanded rapidly in the past 15 years, with the suburban sprawl extending onto flood plains that are prone to flash floods when precipitation is extreme, such as during Hurricane Harvey. Previous heavy rain events in Houston in 2015 and 2016 (neither connected to a hurricane), and also in Mumbai in 2017, 2015 and 2005, show that inland flooding in urban areas is becoming a huge driver of losses.
Yet, despite being the most wide-reaching and frequent hazard, a significant share of flood exposures globally remain uninsured. China has the biggest flood protection gap, but a number of flood risks in mature markets such as the US, Canada, Germany, Italy and the Netherlands are uninsured also. In the US, it is estimated that two-thirds of annual expected losses from flood events are uninsured. The Federal Emergency Management Agency provides flood coverage to homeowners through the National Flood Insurance Program (NFIP), while private flood insurance policies are only very niche and not widely available. To date most US households remain heavily exposed to flood risk, in total up to about USD 10 billion annually (the NFIP insures only up to USD 5 billion in total). In the rest of the world, the uninsured share of the loss potential is even higher, thus placing a heavy burden on households and societies/economies.
Adverse selection is a main explanation for the lack of private flood protection cover availability from insurers. Homeowners more exposed to flood risks are also the more likely to buy flood insurance. However, today there are risk assessment tools that allow insurers to fairly price flood risk by using location-specific risk-based premiums, thus widening the insurability of flood risk. This, combined with increased risk awareness among the exposed populations, can help close the protection gap. To this end, collaboration between government (with responsibility to promote risk awareness, management and mitigation) and the insurance industry (with expertise in building innovative risk protection solutions), is crucial, as seen in the case of the risk pooling mechanism of Flood Re in the UK. Flood Re was the direct result of such collaboration to ensure that even properties at the highest risk of flood can access affordable coverage while still allowing insurers to price the hazard appropriately and at the same time discourage building in risky areas.
Government/industry collaboration was also the main driver behind the rapid increase in flood insurance penetration in Australia following devastating floods in Queensland in 2010 and 2011. The losses from those floods served as a wake-up call: they drew attention to the fact that many insureds had only partial coverage and that not all flood losses were included. The example of the Australian experience could be used elsewhere to help grow the market for flood insurance.