Flood Risk: Question Is Where, Not When
Flood Risk: Both the nature of these storms and floods, and their impact on property owners are getting close attention, and that is welcome because it is changing the way people think about underwriting insurances.
So stop wondering when a serious flood will happen – it is way more important to understand where the damage will be when the flood occurs.
‘1-in-a-thousand-year rain storms’
Only catastrophic events (i.e. hurricanes) capture attention in the media. But the combination of some massive floods and the continued progress of private flood legislation has started conversations that are overdue. Recently, Jeri Xu of Swiss Re published an article that illustrates such a change of perception.
She offers a very useful way to think of the rain events (what NOAA calls 1-in-a-thousand-year rain storms) that have caused some of the most serious recent floods (i.e. 2016 Texas, West Virginia, Maryland and Louisiana).
Because these types of flood-causing storms are localized at the county-level (roughly speaking), and there are about 3,000 counties in the country, it is not unreasonable to expect three flood-causing thousand-year rain storms every year. With this insight, Xu has transformed the extremely rare to the commonplace and reconciled the headlines with the stats.
Xu and the headlines are teaching us to stop wondering when a serious flooding is going to happen – it is way more important to understand where the damage will be when it does happen.
People need information that will help them understand the likelihood of a specific property flooding when there is flooding, because the water is coming, maybe in your neighborhood!
Karen Clark & Co. has taken such an approach for hurricanes: The software assumes an event (the firm calls them characteristic events, or CEs) and then calculates the expected loss results based on that CE happening.
A handful of hurricanes will land on the coast in the next year. Also: a handful of significant inland water events will happen. Where? The maps will show the opportunity when something will happen.
Maps are not glamorous or technologically exciting things. They have done their work for many years and, provided that they are up to date, are an effective way of communicating a generalized level of risk. However, they are far from perfect, and it is possible to identify a number of improvements that could be made with some of the big data technologies now available.
In so doing, the flood map could become a poster child for the idea of smart cities.
Ultimately, the winners in the insurance space are the carriers that best know what they insure. Fortunately, in an environment where big data is becoming more available, and more advanced analytics are being employed, it’s now possible for most carriers to acquire this knowledge. Whether they’re using this knowledge in building strategy, smarter underwriting or pricing to risk, the results are the same: consistent profitability.
Effectively pricing to risk gives carriers the opportunity to win without relying on protecting a secret, profitable niche. In the end, this will give them the ability to profit in multiple markets and multiple niches across the entire spectrum of risk quality.
Flood zones conclusions
- Damages are often modest (less than 10 percent of the building value), but they can be catastrophic
This is one of the defining characteristics of flood as a peril – not many cat perils can cause damages that start at minimal and extend to full building replacement costs. It’s a good thing that flood risk assessment analytics can handle that aspect of the peril, too. The amount of damage is highly correlated to the depth of the flooding (the velocity of the water is also a factor), and by the very nature of how flood is modeled, those depths are absolutely available.
- Claims are increasing through time but spread broadly through space
Claims do have a tendency to cluster in certain parts of the country, but there is no state or place that is immune to flooding. This fact supports the case for a homeowner’s policy to include water risk as a standard peril, not to mention the importance of not liming flood risk analytics to flood zones.
- The claim rate is not statistically different inside and outside the 100-year floodplain
This conclusion is very much related to #2 are spread everywhere, and they do not pay attention to zone boundaries. This is another reason for flood-insurance and analytics to cover everywhere, and not just the risky zones. Here’s a crash course on three common types of flood to help you better assess your risk.
- Conclusion #4: The adoption of risk-reduction measures will reduce your flood loss
The fact that flood resiliency and protection reduces risks should be obvious, and it is hardly controversial. Commercial and industrial underwriters need to consider resiliency on every submission – as the risks get bigger, it gets more important.
Looking at flood risk by where, not when, is an effective way for underwriters to manage their business while considering this fact. More importantly, it is a view of risk that supports the creation of insurance products that can help narrow the protection gap in the U.S., because it is unacceptable to have 85% of damaged homes (in Louisiana of all places) without flood coverage.
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