Tackling America’s flood risk problem
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The personal and economic cost of flooding is increasing every year. Extreme weather events, heightened by climate change, coupled with the fact that many new homes are built on flood-prone land, is making the problem worse. Worldwide, economic losses from natural disasters in 2017 reached USD 330 billion. Insurance covered less than half of those costs, leaving a global protection gap of USD 192 billion.
Underinsurance severely hampers communities' ability to bounce back and recover from a disaster. In the US alone, it is estimated that only one in six households has flood protection. Of the USD 15 billion in economic losses suffered by the US on average every year as a result of flooding, only a third –USD 5 billion – is insured.
Closing this protection gap is critical in reducing the cost of flooding to individuals and communities and allowing them to get back on their feet again.
Across the globe, the risk of flooding to communities is increasing. And on average it affects more people worldwide than any other type of natural catastrophe because flooding can occur practically anywhere.
Records indicate that extreme weather events, such as torrential rainfall and severe storms, are increasing in number and intensity as our climate continues to change. Coastal communities can be some of the worst hit, but are not the only ones who may suffer.
Severe flooding forces millions of people from their homes every year. This issue will only get worse as the pressure of providing homes for a rising population, particularly in cities, sees more housing developments being built in flood-prone areas.
Since sigma records began in 1970, the number of catastrophic events per year has significantly increased, according to figures from the Swiss Re Institute. This has come at a huge economic cost: worldwide, economic losses from natural disasters in 2017 reached USD 330 billion.
Of that total economic cost in 2017, flooding alone caused USD 25 billion. And were it not for the fact that the immense flooding caused by Hurricane Harvey was counted under storm losses, these costs attributed to flooding would have been even higher. Climate change could make matters even worse. According to scientists from the World Weather Attribution project, Hurricane Harvey's record rains in 2017 were made at least three times more likely by climate change.
Insurance only covers a fraction of the cost of recovery from natural disasters. Flooding, in particular, is one of the most underinsured perils around the globe. That leaves it up to governments and, ultimately, the taxpayer to pick up much of the bill.
In the US, for instance, only one in six homes has flood insurance. As a result, the US faces a large protection gap of USD 10 billion in average annual losses that are not covered. Closing this gap is vital for keeping communities resilient and helping them get back on their feet – quickly.
Why is there a protection gap?
“There are various reasons why so many US homes are underinsured,” explains Daryl Polenz, a US Swiss Re Client Manager who works with several insurance companies to improve flood protection for consumers
“Some homeowners simply don’t think they need it; they don’t live in a designated flood plain and, to them, the risks of flooding are minimal. Others are worried that the premiums will be too high. Worse still, many homeowners assume that their homeowner insurance policy covers flooding, only to find when the time comes that this isn’t the case.”
But the reason there is such a huge protection gap isn’t all in the hands of homeowners. Insurers are lacking the tools to accurately price flood risk and therefore are not in a position to offer comprehensive cover to their customers.
While some US homeowners benefit from the National Flood Insurance Program (NFIP), this government programme is largely used by those for whom flood insurance is a mandatory condition of their mortgage.
The obvious answer is to enable the private market to take on more flood risk. A new partnership between Swiss Re and Florida insurer Security First aims to do just that.
Modelling flood risk
The chief obstacle for insurers wanting to offer cover for flooding is the lack of ability to price it correctly. Traditional policies - such as those provided by the NFIP - rely on flood maps, which aren’t necessarily complete, and don’t differentiate between risks within the same flood zones.
Even those living outside of flood map zones can be at risk of flooding. More than 20% of NFIP claims and 33% of Federal Disaster Assistance relate to properties that aren’t mapped as high risk by the Federal Emergency Management Agency.
“Even looking at houses that are right next door to each other, one can be very flood exposed and one can be not exposed at all,” states Polenz.
“Think about two houses next to a river where one is on the riverbank and the other one is just past that house up the hill. The risk of flooding is completely different from location to location.”
A clear solution to the pricing problem has emerged from the combination of better data and better access to data, and vastly increased computational power. In other words, the ability to accurately model the risk.
Swiss Re’s flood risk model is the culmination of over ten years of work.
Flood insurance policies based on the Swiss Re flood model are priced according to the individual risk exposure, which is made up of thousands of data points. For instance, that data could include location of the structure, type of construction and insured value. In fact, some 400,000 modelled events - things like urban floods and high rainfall - can be taken into consideration when analysing the premium.
Providing accurate pricing makes the product more affordable to homeowners, and Swiss Re constantly validates the model; taking recent flood data and making sure the model performed as expected.
The model is now available to homeowners, through partnerships with local insurers. Swiss Re has teamed up with local Floridian insurer, Security First, who is using the model to offer flood insurance to homeowners that may have found it difficult to be insured previously.
For the first time, flood risk will form part of a wider homeowner policy and support all of the homeowner’s insurance limits to the same level.
“The product itself, with the Security First example, is dramatically superior to what has historically been available to most of these homeowners,” says Polenz.
The impact of this new individual risk-based model on flooded communities will be dramatic. A significant influence on how individuals and communities recover from flooding comes directly from how much money is available in the first days and weeks following the disaster. That can only improve as more and more homeowners access insurance.
“This innovative policy approach is proof that flood is insurable in the private market and we believe it can be replicated throughout the US to help solve a profound underinsurance issue,” says Polenz. "This evolution is a win/win as it will better protect communities but also allow insurers the confidence to enter this market, and do so profitably."
As greater access to data helps insurers better understand a peril once thought ‘uninsurable’, closing the flood protection gap is well within reach.
“There's another uncomfortable truth for our industry: many don't want insurance even if they know they're at risk. And if a policy is hard to purchase, they almost certainly won't buy it. There's also a question of perceived affordability. Our industry needs to address all of these factors more pro-actively than we have in the past.” – Eric Smith, writing in the Houston Chronicle.
“True resilience requires a broader approach to flood risk management that focuses on saving lives and preventing damage in the first place. Such an approach seamlessly combines risk assessment, prevention, response and recovery in a cost-effective way.” – Edi Schmid, Group Chief Underwriting officer, writing in Intelligent Insurer.