Floods have always been part of life on earth, but recent events in Australia, Brazil, Dubai, and Texas have been significant, sudden and caused major disruption. Changes in the world’s climate are making previously unusual events into something we all need to be prepared for. Insurance and risk management has a positive role to play in supporting aviation organizations as they strive for resilience.
Dubai’s recent deluge was particularly eye-catching because it occurred in a region that is famously arid. The UAE has minimal annual rainfall, typically around 78mm/year (for comparison, the UK’s average rainfall is around 1,220mm/year) and rainstorms are rare in the region. When they do occur though, they are often intense, and what is concerning is that records related to the intensity of rainfall in the region that were broken in 2022 have been broken again less than two years later.
An estimated 1,244 flights were cancelled over the initial two days of the incident, and there are likely to have been subsequent delays and cancellations throughout global networks. While it’s possible that organisations may be able to recoup some incurred costs from insurance – given there was limited or no physical damage to aircraft there is likely to be financial costs that are not recoverable from insurers.
Insights from WTW’s ARI
According to data collated from WTW’s Airport Risk Index, which leverages scientific analysis from 110 global airports, despite the generally arid climate in the region, intense rainfall events and flooding pose a credible threat to operators in the Middle East alongside other more familiar environmental threats such as heatwaves.
ARI’s data on flooding scenarios for airports in the Middle East shows that returning to normal operating conditions could take anywhere from 11 days to a full year, depending on the scenario severity level, operator resilience and vulnerability characteristics. Airports that have not recently faced a flooding event should assess and enhance their resilience to these disruptions.
Though the ARI model isn’t a definitive indicator and not all operators in the Middle East will experience all of the scenario levels, it serves as a useful tool for stress testing and making comparative analysis. It helps identify potential vulnerabilities to facilitate site-specific investigations to enhance airport resilience which can help tailor insurance coverage to realistically reflect airports’ flood risks. It also serves as valuable benchmark for thinking about future disruption from climate risks: having a clear picture of today is essential to understand which events might increase or decrease in severity in the future.
Why is it happening?
Dubai experienced a similar rainfall event in 2022, and there are other records of high intensity rainfall events in the region, so the 2024 event is not without precedent. However, climate change is leading to an increase in significant rainfall events globally. A warmer atmosphere holds more moisture, resulting in heavier rainfalls when they occur. This trend indicates that the Middle East should prepare for more disruptions as the climate continues to change.
Additionally, rapid urbanization means that 85% of the UAE’s population lives in flood-prone areas. As we discussed in recent articles that you can read here and here, urbanization is creating a similar story in many parts of the world. Areas that would have previously been naturally available for water to run off and absorption have now been built on.
More moisture in the atmosphere combined with less ground to absorb it when it falls as rain means there is an increased likelihood, visibility and impact, of significant flooding. While these events are relatively infrequent, the risk is expected to increase without further interventions in engineered solutions, such as enhanced drainage, resilience measures for communities and buildings, and investment in forecasting and early warning systems.
Parametric insurance comes into its own
The maturity of the aviation insurance sector can be helpful because relationships between airlines and their risk management and insurance partners tend to be relatively open and positive. Parametric or index-based insurance programmes can offer support in the event of major rain-related cancellations in arid regions for airlines facing a diverse and changing natural operating landscape.
Parametric insurance can be designed to address loss of income or increased costs associated with adverse weather. They are typically based upon robust, independently recorded data, which makes them simple to design and tailor to an insured’s geography, risk exposure, risk appetite and budget.
Most weather-related events can be used for a parametric index. This includes catastrophe events such as tropical cyclones, floods, forest fires, drought and hail, but weather extremes of temperature, rainfall, river height, windspeed and wave height can also be covered.
Claims are triggered if the measurement of an agreed reference index moves above (or below) an agreed trigger point, with the claim amount calculated according to a pre-agreed scale.
The benefits of a parametric approach
There are several benefits to taking a parametric approach to insurance to manage flood and other weather-related risks for aviation organizations. It offers protection against direct and indirect economic loss from adverse weather and there doesn’t have to be direct damage to insured assets to trigger a policy. This means that non-damage business interruption can be covered.
Payouts can be scaled and tailored to provide coverage for specific scenarios and intensities of event. The clearly defined parametrics remove the need for onsite loss adjustment, allowing claim payments within days or weeks. With an unrestricted use of claim proceeds, organizations can use payments as they see fit, whether that’s to replace damaged assets, supplement revenue, pay for additional expenditure, invest in risk management, service debt or provide financial support for customers, employees or communities. This is a highly flexible form of financial protection.
Robust partnerships
The recent floods in Dubai and further afield highlight the importance of maintaining strong relationships with insurance partners and making sure that risk management and risk financing are fit for the needs of aviation organizations in the current, changing environment. Insurance brokers are a good place to find the expertise to conduct assessments and advise on both risk mitigation options and transfer solutions.
Rising prices in several parts of the aviation insurance sector have attracted capacity across the market, and in some cases this competition is in the process of driving down the cost of insurance. This can create a temptation to select insurers based on price alone, but this should only be one aspect of the consideration.
Working with trusted partners that embrace innovation, ensure that an insurance policy is appropriate, and keep a weather eye on what the challenges are today and what they could be in the future, must be a key consideration when formulating a risk management and insurance strategy. The future landscape changes the assumptions and cost-benefits of risk management measures, and these should be appropriately accounted for.
Events such as the recent flooding highlight the importance of accurate risk assessment models that incorporate changing climate conditions and urban development patterns. Historical data is always useful, but understanding how it could change, and being ready for it to change, is likely to become increasingly important.
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