We see this rise in both the incidence and in the severity of extreme weather events. At the same time, continued increases in the world’s population, economic development and the trend towards urbanisation means that the insurance industry’s potential exposure to loss is higher than at any point in history. Water risk is not only important now, but it will inevitably become ever more so as these trends continue.
Previous water-related events have also shown that the impact on society can be very significant and hugely expensive. The 2013 European floods for example, occurred in the middle of summer with, in some cases, water reaching levels never recorded before as rivers burst their banks and flood defences collapsed.
By contrast, the UK’s experience of flooding in February 2014 demonstrated that the threat stems not necessarily from water bodies, but sometimes from rising groundwater: flood risk is not simply isolated to areas in the immediate vicinity of a river or other body of water. Thailand’s near six months of flooding in 2011 showed that flooding can have a global impact, in particular the I.T. and computing industries were severely impacted as the supply of hard-disk drives from the affected region collapsed. It is imperative that the insurance industry not only understand risks in the context of an individual policy, but also in terms of geography, and the potential impact on the global supply chain.
There are signs that potential exposure is still underestimated. Standard & Poor (S&P), the rating agency, warned in October 2014 that in the UK market, insurer understanding of flood risks is far less advanced than other natural catastrophe risks .
According to S&P, the UK industry faces two challenges. Firstly a lack of understanding means that “insurers are at risk of inaccurately estimating their flood exposures, which could lead to larger-than-expected losses.” And compounding this is that the potential impact of climate change may mean that planned adaptive actions on flood defences could be insufficient, exposing the industry to further risk, as according to S&P “if the Government does not deliver adequate defences, we do not believe that Flood Re or any other insurance solution could deal with the increase in flood risk that will result from climate change.”
The insurance industry can take two measures to respond to this situation.
The first measure is to better understand existing exposure to flooding and to manage future exposure to ensure future profitability. This can be achieved through better use of data and modelling to ensure better risk selection, pricing and exposure management control. An important step here is to systematically adopt the assessment of risk at the individual property level across all distribution channels, rather than via proxies such as post code, to enable a more granular and complete understanding of geographic risk. This can enable better pricing decisions, help to avoid excessive risks and enable underwriters to take on business which might have been excluded under a less granular approach.
Insurers must also invest in exposure management so they have visibility across the entire book. Insurers today need more than ever to understand total exposure to an individual event in a geographical region, and across their network of cover holders. At LexisNexis, it’s imperative to offer data solutions, such as Map View, that provide capability in both areas. By investing in data on flooding and the skills and capacity to apply this information to underwriting, insurers can continue to operate profitably in areas subject to flood risk.
The second measure is to support wider initiatives outside of the insurance industry towards increased flood resiliency. Initiatives underway include a shift in new building development to better appreciate and protect against the risk presented by water, the development of better flood defences on a national scale, the retro-fitting of buildings to account for the risk of flooding and a general movement towards incorporating the risk of flooding into planning and decision making at all political levels.
The insurance industry has an important role as a provider of expert advice and a voice on the potential costs of flooding. It can also help drive business in the right direction in practical ways, for example, by using data analysis to recognise which policyholders have invested in flood mitigation and rewarding them accordingly.
Undoubtedly, flooding will remain an increasingly important issue, and whilst our hope is that adaptive measures are successful, experience demonstrates that radical change of the scale required is often slow. This means that insurers need to invest in the data solutions that enable profitable underwriting both today and in 2050 – you cannot mitigate a risk if you do not fully understand it. Understanding risk at the granular, individual policy level, and having full visibility into exposure across your business is no longer a ‘nice to have’ – it’s essential to profitability.
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