Flood insurance- where the rising tide has NOT raised all ships

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The problem is known, the data lakes related to the problem are deep, there are huge costs associated with it and plenty of human suffering.   Whole sectors of predictive data businesses have grown to better understand what is behind it, options abound in an attempt to mitigate its effects.  Governments around the globe spend billions in preparation for and response to the events.

So why isn’t flooding, flood damage mitigation, flood damage repair costs/financing, and flood insurance availability less of a global problem?

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

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The breadth of the problem

Aon indicates global economic losses due to flooding between 2011-19 exceeded $600 billion US, with only $111 billion insured, an amount that surely does not include all infrastructure and productivity losses, or loss of life.  A $500 billion cumulative coverage gap; surely things have improved during the nine-year period, yes?  No.  The latest three-year period indicates a coverage gap of 84% of flood losses, worse than the cumulative 81% during the decade.

Innovation’s Data Analysis Effects

Much has changed in flood risk prediction since the early 1970’s when public flood programs were introduced (e.g., National Flood Insurance Program in the US).  At that time and until recently efforts expended in determining flood risk for a subject area were through elevation mapping devised from physical surveys of respective areas.  These elevation determinations in conjunction with hydrologic data were the default tool.  Problem was that there were few if any insurance carriers that would write flood cover without subsidy from an area’s federal government. In fact, in some jurisdictions (like the US) flood cover could only be written within a government program.  Too much risk of a regional Probable Maximum Loss event, actuarial premiums would have been prohibitive, adverse selection would be the driver of the coverage chase, etc.  As such government programs were the default option, and even at that participation was low.  In the US an overall participation rate in flood insurance even as late as 2017 was less than 15% of properties.

There have been remarkable advances in mining and analyzing data to identify a property’s relative flood risk, and the probability of a significant flood event, some examples being:

  • FloodIQ.com, a product of tech innovator First Street Foundation allows the user to input an address within the US and obtain an idea of rising water’s effects
  • Previsico , not only has developed tech do assess probability of flooding in the UK, but includes live modeling during flood events and includes warning capabilities
  • FloodMapp , before, during, and after services- modeling, dynamic prediction and flood damage quantification for claims
  • Hazard Hub , has risk modeling data that in addition to NFIP flood maps model surge and even tsunami risk by property address
  • https://floodscores.com/ – provider of property specific flood risk info (thanks Sam Green)
  • https://www.floodinsuranceguru.com/- included this resource due to the firm’s unique approach to mastering flood tech methodology and applying that knowledge to risk assessment through flood maps.
  • Leveraging social media for warnings- Sri Lanka has had success notifying more remote villages of impending storms/flood potential. Penetration of smart devices provides a warning platform.  Other chronic flood regions like Bangladesh are beginning to see the need of tech warnings due to recent flood events.

Funding risk management

The extensive flood protection gap suggests that private funding of flood risk has been just a small part of overall flood insurance.  The US market has primarily had NFIP response (or ex post government/emergency funds to account for the coverage gap)- a US government flood insurance market that has continuously functioned as a deficit program due to subsidized rates, significant adverse selection/moral hazard issues, being seen more as a constituent response vehicle than an insurance scheme by congress, being administratively under-funded, and not being a mandatory participation plan so the volume of participants is too low to be self-sustaining.

Properties in flood-prone areas within the UK market of late have benefited from the Flood Re program where UK insurance carriers contribute to the flood insurance plan (as do property owners).  Without belaboring the functioning of the plan (take a look at the website) one can say it’s as much an effective hybrid industry/government/property owner plan as found anywhere.  Its plan is to function as is for a few decades then convert to a fully private plan.

In most countries the largest volume of response is in the form of government emergency finds, particularly for cleanup, infrastructure repairs, and immediate populace support.  While significant, these government responses are inefficient at best and typically delayed by legislative inaction. 

Where there is much optimism for funding is in the capital markets- catastrophe bonds and insurance linked securities (ILS).  Per the data found at artemis.bm, ILS and funds held for flood risk are a small portion of the more than $40 billion US held in the reinsurance/ILS market.  There is plenty of capital in the market, however, and the appetite for returns over those of typical financial market vehicles is building interest in ILS.  The complexity of reinsurance/ILS deals is increasing, as is the level of apportioning tranches of risk across hedging deals.  The key is that as private flood insurance becomes more available the need and interest in alternate risk financing will grow.  An 80+% coverage gap for a peril that is becoming increasingly more frequent, in combination with the trillions of dollars of property at flood risk will find ways to attract capital markets’ involvement, and as data availability and granularity increases the pricing of the vehicles will become even more sophisticated.

2/20 update from Steve Evans of artemis.bm:

“There’s definitely a need and opportunity for alternative capital and ILS within flood risk, not just in the U.S. but globally.   Activity is being seen, the majority of ILS strategies carry significant exposure to major global flood events, but this is largely through participation in the reinsurance programs of insurers and reinsurers.

Specifically in flood risk, FEMA has just completed its third flood catastrophe bond, taking its use of ILS capacity to support the NFIP’s reinsurance needs to an impressive $1.2bn.   But beyond that, flood specific cat bonds aren’t a feature of the market yet, as there aren’t that many potential sponsors of them yet.   Perhaps one day we’ll see the UK’s Flood Re following suit and issuing a cat bond as part of its retro program.   But overall the ILS market continues to absorb increasing amounts of flood risk, through treaties that cover all perils related to tropical cyclone risks, including surge and flood, which means there is a significant exposure to flood events, but largely if they are caused by a tropical storm or hurricane.”

Flood insurance going forward

A problem not considered often in the flood peril aftermath is that flooding affects not only individual property owners, but everyone within a flooded region.  Even the elevated property that is not flooded is affected; its residents are prevented from venturing out, cannot not shop at a flooded store, are unable to get municipal services due to closures, etc. And- the cost of government responses in the absence of insurance are borne by all within a community.  The other factor that is often overlooked?  Insurance proceeds ‘jump start’ recoveries with funds for local businesses; lack of widespread flood insurance cover leads to much less money on the street after an event.

Consider flood insurance penetration within the US- less than 15% of all property owners hold flood cover, and most who do keep it due to mortgagee requirements.  A recent article shared by RJ Lehman of the R Street Institute about the Mississippi flooding occurring as this article is written reinforces that most property owners will be left without a financial backstop for flood recovery (by the way- in the US an article like that is written after every flood or hurricane, the only copy that seems to change is the name of the city/town and the number of policies in force.)  The recovery will come without insurance- slowly, funded piecemeal until finally government funding will be made available.

Is it time for regional parametric programs funded by taxes and made available immediately after a trigger event?  Seems a really good idea since no matter what in the flood peril world the government is the funder of last resort, why not make it the quick response at no more cost than we are used to source? FloodFlash has proven event-based parametric flood cover to be effective option for property owners in the UK, and per Artemis’ reporting SJNK (Japan) is rolling out similar cover for property owners there.

Is it time to make flood insurance a requirement of all homeowners insurance holders?  Flood Re seems a reasonable model to follow, and even with disparate regulatory bodies action can be taken to have an entire region/state/country participating.  Flood perils are growing, so are costs, so is the exposure to critical economic areas.  Smarter approaches to private flood insurance that is based on knowledge of not only insurance but on the factors behind flooding and risk as is used by Chris Greene at FloodInsuranceGuru are needed.  Partnerships such as experienced with Previsico and Loughborough University need to be supported.  Subsidized premiums are OK, but much greater breadth of participation is required to make programs even remotely viable.  The underwriting, mapping, and response tech is there, the political and economic will must be also.

 

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