Flood losses: insurance loss goes up, coverage goes down

It’s a tale as old as time. Where flood risk is high, insurers either ramp up the cost of coverage or turn tail and exit the market, with the most vulnerable communities left high and dry (or should that be low-lying and wet?). Does it always have to be this way? Miranda Little explores…

Flood losses: The rising costs

If you search the internet for figures illustrating the high cost of flooding, you won’t have to search very long. Examples that crop up straight away include the flash floods in Germany in July 2021 that caused aggregate losses of €57bn ($58bn), and floods in China in the same year that caused $25bn of economic losses. 

Between 2018 and 2022, losses due to flood were estimated at $299bn. Stretch the time frame to the past 30 years and that figure heads into the trillions. The list of eye-watering statistics goes on.

These figures are economic losses, with insured losses inevitably lower. Of the $5bn losses from the floods in China in May 2022, for example, only $300 million, or 6%, was insured. But that trend is also on an upward curve; Swiss Re’s recent research found an upturn in flood insured losses over the last 20 years, cumulatively amounting to close to $140bn since 2001.

And those figures are only going to get higher. Fathom estimated in its research on inequitable patterns of US flood risk that flood losses could rise by as much as 26% by 2030, due to climate change (as the atmosphere warms, rainfall will become more intense, sea levels will rise and the frequency and severity of flooding will increase). But climate change is only part of the story; a factor that’s often excluded from the conversation is the increase in exposure. Countries around the world have spent the past decades increasing their exposure to flood risk instead of adapting to it – mainly by expanding in terms of both population and footprint. In the same research, Fathom found that in the US, population growth in flood-prone areas will put 3 million more people at risk of flooding by 2050. That’s four times the increase compared with that caused by climate change. 

Response from insurers

Many private insurers have responded to this increased risk either by exiting markets, leaving whole communities uninsurable, or by raising premiums to levels so high that property owners are ditching them. This disproportionately impacts low-income communities, which are both less able to afford insurance and more likely to live in vulnerable areas. But it’s also affecting more affluent areas. In Florida, consumers have been hit with a 125% hike in property insurance premiums over the past five years, prompting many homeowners to either move out or try to “self-insure”, i.e. save on their own to pay for any potential flood-related damage. The upshot of all this is that only 4 percent of homeowners in the US have flood insurance.

Clearly this is a precarious situation, for both those without insurance cover and the industry itself. Exiting markets altogether is not a sustainable business model and covering only ‘good’ risks will only increase the protection gap. Meanwhile, leaving governments to mop up is bad for the economy and good for nobody. 

Addressing the problem

The first step in addressing the problem is for insurers to fully understand their exposures and risks. And that’s where more and better, forward-looking data and more advanced tools can help. With better data you have more certainty around the risk, and more certainty means insurers need to hold less capital against those risks, and that means the cost to the customer is lower.

The tools the insurance industry has been using since the 1980s to calculate accumulative risk associated with severe events (cat models) have evolved dramatically in recent years, at the same time as improvements in data availability and increases in computing power. The most state-of-the-art cat models include Fathom’s, which uses granular Monte Carlo loss simulation to more accurately quantify risk and covers all major flood perils: fluvial (river), pluvial (rainfall) and coastal flooding.  

How will this help insurers close the protection gap?

It helps risk managers to assess risk more effectively, helps underwriters price risk more accurately and buy the necessary reinsurance to protect their portfolio. It ultimately means they can design and build more affordable products and get them into the hands of more customers.

The insurance industry cannot, of course, stop floods from happening. But we do have the tools to better understand the risk. That’s the first stage in helping people and businesses prepare for, adapt to and recover from the increasingly severe impacts of climate change and the rising exposure of communities everywhere.