Flood: a threat not to be forgotten
The world's battle against the coronavirus is rightly dominating the headlines and it's been inspiring to see how communities, businesses and governments have come together to fight a foe that few of us were giving much thought to just a few short months ago.
As we all search for light at the end of the tunnel, many of us find it in the fact that medical and government officials are stressing that, given time, this will pass and life will return to some version of the 'normal' that we all enjoyed until recently.
Unfortunately, not every threat the world faces is guaranteed a conclusion where we come out on top. And one of those that continues to threaten our future is climate change.
The Swiss Re Institute recently released our latest sigma "Natural catastrophes in times of economic accumulation and climate change risks," which looks at the threat climate change, and the natural disasters it exacerbates, poses to societal resilience.
Here in the US, one of the perils climate change impacts is flooding. It's no longer someone else’s problem — it's everyone’s problem. Water has a way of finding you even if you don’t live in a flood plain. In fact, very little of the US is spared from flooding these days as the cost grows and the hazard increases. There are several contributing factors but the most notable one is climate change. Climate change affects flood risk in these ways:
- Both the frequency and intensity of torrential rainfall events are now increasing, since a warmer atmosphere can hold more water, resulting in damaging flash floods.
- Sea-level rise, driven by a combination of higher ocean temperatures and melting glaciers, is exacerbating storm surge, leading to more damaging coastal flood events.
- Studies show a warmer climate leads to changes in weather patterns and slows the motion of hurricanes, allowing for storm surge to occur over multiple high tides, and rainfall to accumulate over a number days. We saw the flood impacts of such slow-moving hurricanes in 2017 (Harvey), 2018 (Florence) and 2019 (Dorian).
Presently, flood largely remains uninsured or underinsured in the US, with only one in six homes having flood insurance. The insufficient penetration of flood insurance leads to annual average uninsured flood losses nationwide of USD 10 billion, according to the Swiss Re Institute. Unchecked and unaddressed climate change will only serve to further enhance the financial vulnerability of the US to extreme weather events, widening the protection gap in the future.
The insurance industry, including the growing private flood insurance market, has an increasingly important role to play in supporting societal resilience in the face of an evolving flood risk landscape. Admittedly, flood was long considered an uninsurable risk. An inability to effectively model, underwrite and price it left private insurers reluctant to offer coverage. But that’s all changing.
Flood modeling has improved exponentially, allowing insurers to offer enhanced protection to their customers with confidence. No longer are underwriters limited by historical experience and rating tables. Thanks to high-resolution data, it’s now possible to rate individual locations for flood, which means an insurer can offer flood coverage on a house-by-house basis.
These improvements in flood technology and modeling provide a new business opportunity for insurers. Swiss Re-commissioned research has identified the potential market size for private insurers state by state. In some instances, this runs to several billion dollars. At a time when insurers are facing profitability challenges, this is a moment the industry can, and should, seize on.
Where reliable risk assessment and potential healthy return goes, capital will follow. More and more insurers are incorporating flood into their strategy and getting in the flood business because they know their customers better than ever. Carriers in just about every region of the country are recognizing the significant commercial opportunity and have begun offering flood coverage to their customers.
Consumers are noticing, too. Insurers are seeing brisk take-up rates on flood-eligible new business as customers become more aware of their true risk to flood damage; and because the price more accurately reflects the risk, they’re now making the smart decision to purchase the coverage.
When disaster strikes, insurance is a first responder. Flood has been an exception, until now. The door to the private flood insurance market is now open, and can be a powerful tool in helping communities become more resilient to extreme flood events in a changing and warming climate.