Maurizio Savina, director, product management, RMS says flood loss events are increasing but so is the industry’s understanding of exposures.
Maybe it is strange to regard flood as an “emerging” peril, but it does have two distinct characteristics that place it into this category. First, for a few years now, flood losses have been driving an ever-increasing portion of overall nat cat losses, and second, new technology is now allowing for better flood risk management and transfer.
With these increasing flood losses, there is a basic need for (re)insurers to use the available technology, to take control and better understand this complex peril. There are also many profitable opportunities too.
So, whether you want to avoid losses or chase profits, it is important to consider three principles.
The first principle is to recognise that flood can span across a broad range of temporal (time) and spatial scales. And as a result, looking at a large region such as Europe, for example, there are plenty of strategies to adopt to diversify the risk.
Look at differences in flood seasonality; the UK peak flood season is in the autumn/winter, whereas there is a very limited risk of flooding in the snow-bound Alps during this period. While portfolios distributed in eastern France and Belgium, or Germany and Czech Republic might be subject to large losses as several long European rivers cross these countries.
Looking for opportunities to write more flood business will improve both mutuality and diversification, and with the addition of Italy and the Republic of Ireland, the RMS Europe Inland Flood High-Definition (HD) models provide 15 countries to choose from, and it is the only pan-European flood model available in the market. Based on more than 20 person-years of research and development, it enables the insurance and reinsurance markets to access the true risk of flooding, from location to multi-country/pan-European scale, giving an innovative view on how flood business can grow in a diversified landscape.
A second principle is to use a view of flood risk that recognises the connection between physical and financial protection. Where investment has been placed into well-managed drainage and flood protection measures, this can help to reduce the frequency and intensity of flood damage to a very manageable level.
RMS Europe Inland Flood HD models come with the latest information regarding existing drainage and flood protection in Europe. But these models go beyond a static analysis current flood protection level and allow (re)insurers to adjust the Standard of Protection to ask “what-if?” and evaluate the effect on risk and premium if various flood measurers were put in place.
The final principle continues this theme with a recognition that investment in flood defenses can bring significant benefits, with some studies showing examples where the long-term savings can be worth five times the investment or more.
This ability to show how flood protection measures can cost-effectively reduce risk, opens a new relationship between insurers and clients as a trusted flood risk partner. Overall, these capabilities offered by the RMS flood models break the cycle of the insurer being passive in risk reduction, towards adding significant extra value as a holistic solution provider.