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Table of contents
Foreword
11
15
Conclusion
25
Foreword
Everyone who lives close to a river generally knows of the risk from flooding. However,
flood risk is not obvious everywhere. Every year we witness floods in areas where hardly anyone was expecting them. In fact, no other natural disaster affects more people
than flood. Most households and buildings could be affected by intruding water as a
result of local flooding.
In 1998 Swiss Re published Floods An insurable risk?. The report concluded that
flood was an insurable risk if the principles of insurability were met. Since then, flood
insurance has become widely available in many developed countries. However, key
insurance principles were not followed in all cases, and large losses have called into
question the economic viability of flood insurance. In contrast, in most developing
countries flood insurance is neither available nor affordable.
Indeed, it is more difficult to insure floods than many other hazards, not least because
many people are not aware of their risk exposure. However, thanks to recent improvements in the modelling of flood risks our own Global Flood Zone model being an
example of that and the fact that the actual risk community is sufficiently big, we can
overcome all obstacles in flood insurance.
With this publication we want to raise greater awareness of floods, their risks and the
role of insurance in addressing them. We show what it takes to tackle the challenges
in flood insurance and how successful solutions might look for homeowners and companies. To further illustrate the complexity of the issues involved and present these
in a new and interactive way, we have produced an accompanying App on flood risk,
available for download through the Swiss Re website.
This publication is more than a simple revision of the 1998 edition. While reiterating
key insights already known to the industry some 14 years ago, the research presented
herein builds on the wealth of experience we have gathered since then. No doubt, it
has benefited greatly from improved risk models and state of the art geo-information
technologies. Combined with the collective determination by insurers, governments
and policyholders to better manage flood risk, our newest assessments and findings
contribute towards making flood insurance a viable and affordable option to many more
communities around the world.
Matthias Weber
Group Chief Underwriting Officer
100000
80000
9
5
60000
40000
120000
2010
1970
80
r-related catastrophes
19806
1975
1985
1990
100000
60
5
40
20
Earthquake/tsunami
1
2
3
4
5
Man-made disasters
6
7
8
9
2010
2005
2000
1995
1990
1985
1975
1970
0
1980
2005
120
20000
Weather-related catastrophes
Insured losses from weather-related natural catastrophes, including floods and storms, have
risen sharply over the last twenty years. But most of the total damage is uninsured. In 2011,
USD 113 billion in insured losses was just under one-third of the total USD 366 billion in economic
losses from catastrophic events.
1
2
3
4
5
20000
In all cases, the risk from
flood events is
underestimated. Many residents are not
0 can 1970
aware that substantial losses
occur, 1975
even in geographic locations that have no
100000
river in the vicinity. In 2011, for example,
a heavy cloudburst over Copenhagen
dumped about 160 millimetres of rain on
the Danish capital in less than 24 hours.
This is more rain than the city usually gets
in two months. The floodwaters damaged
houses and disrupted traffic. While in the
case of Copenhagen losses were largely
covered by insurance, rare but powerful
events such as this one demonstrate that
high losses outside known river flood risk
zones are possible. Recent years have
given us a glimpse of what large-scale
flood scenarios could look like in the future.
6
7
8
9
1980
JulyNov 2011
Aug 2002
Jun 2007
Aug 2005
Jan 2011
JulAug 1997
Jul 2007
Dec 2010
Apr 1993
JunAug 1993
Thailand
Germany&
Czech Republic
United Kingdom
Switzerland
Australia
Poland&
Czech Republic
United Kingdom
Australia
United States
United States
Insured loss,
Insured loss,
Total losses
as a % of
as % of GDP
as of GDP
countrys non-life
premiums from
the prior year
12000
1850%
203.50%
3.40%
8.55%
2900
2700
2400
2300
20%
12%
76%
24%
3.01%
2.15%
11.67%
5.89%
0.11%
0.09%
0.57%
0.15%
0.50%
0.13%
0.93%
0.41%
2200
2000
2100
1900
1600
213%
9%
27%
5%
3%
42.28%
1.72%
5.91%
0.64%
0.30%
0.75%
0.07%
0.17%
0.03%
0.02%
2.34%
0.11%
0.41%
0.07%
0.18%
Notes: Premiums for 2011 are estimated. Australias premiums are for 12 months ending in June
Thailands property premiums are calculated including the premium volume of industrial all-risk policies
Sources: Swiss Re Economic Research databases, Oxford economics
Types of flood
the water upstream and causing it to overflow the banks. If the barrier breaks suddenly, damage can also result downstream.
Mudflow: Loose soil on a slope can become
so heavily saturated by intensive precipitation that a spontaneous slide results. The
wave of water and solids hurtles downhill
along gullies and the beds of watercourse,
and is extremely destructive.
Lahar: When a volcano erupts large
amounts of ash, the next heavy rainfall
transports this ash downhill as a mudflow.
A similar process occurs when the icecap
of a volcano is melted by lava.
Groundwater: If the groundwater level is
only a few metres below the surface, precipitation and infiltration from neighbouring
watercourses swollen by flood can cause
the water level to rise to the point where
basements are damaged by seepage, or indeed entire buildings are destabilised and
destroyed.
In 2011, historic rainfall and consequent flooding in Thailand led to the loss of hundreds of
lives and left countless people homeless. The
size of insured loss caused by such extensive
flooding came as a surprise to the international
insurance industry. At USD 12 billion, it is an
extraordinarily high insured loss in the global
history of fresh water flood events. The Thailand event painfully demonstrated that insured
losses from floods can be as high as those from
earthquakes or tropical cyclones. Since flooding can occur in any country, the industry may
be faced with much greater hidden loss potential than it realises.
In response to recent events, Swiss Re undertook a global study to identify other emerging
markets comparable to Thailand which face
high flood risk and benefit from strong economic growth. The aim was to identify hidden
hot spots with latent large flood loss potential.
In the study, emerging markets were ranked
based on a combination of factors, such as real
GDP growth, the ratio of foreign direct investment to national GDP, and flood risk indices by
country. The study revealed that other countries in the world present an even greater flood
loss potential than Thailand. China tops the
ranking, followed by the remaining BRIC countries Brazil, Russia and India.
Top10
Top 20
Top 30
lower ranks
not considered
River flooding in Sheffield in June 2007. The city suffered extensive damage as the River Don overtopped its banks causing widespread
flooding in the Don Valley area. The Sheffield floods were one of a series of destructive floods that hit the United Kingdom during the
summer of 2007.
Principles of insurability
Mutuality: A large number of people who are at risk must combine to form
a risk community
Assessibility: The expected loss burden must be assessable.
Randomness: The time at which the insured event occurs must not be predictable,
and the occurrence itself must be independent of the will of the insured.
Economic viability: The community organized by the insured people must be
able to cover its future, loss-related financial needs on a planned basis.
Similarity of threat: The insured community must be exposed to the same
threat, and the occurrence of the anticipated event must rise to the need for
funds in the same way for all concerned.
trial risks, providing ready answers to questions such as: How far away is the coast or the
river? How big is the river? What is the elevation difference to the next body of water?
Modern satellite data also help to determine
the exact coordinates of a risk by scanning
the horizontal and vertical measurements of a
building or outside storage facilities. Every
time a huge flood occurs, the flood footprint
captured by satellite data helps calibrate the
models further.
Even though just about everything in flood
modelling has improved over the last few years,
the information available is still patchy and
inconsistent. Swiss Res Global Flood Zones
close this information gap. The Global Flood
Zones depict flood exposures at a very granular level for locations in almost every part of
the world.
In combination with CatNet Swiss Res
Hazard Atlas the Global Flood Zones are a
powerful tool to develop flood solutions, provide selective underwriting and accurate pricing, analyse the flood exposure of entire
portfolios and identify flood hot spots worldwide (see page 9).
Swiss Res Global Flood Zones provide detailed flood hazard information and can be accessed through Swiss Res CatNet portal.
www.swissre.com/catnet.
Living room of a house in New Orleans after Hurricane Katrina caused extensive flooding in the region in August 2005. Furniture has
been tossed about and is covered with fallen sheetrock and insulation. The flood waters almost reached the ceiling, as the high water
marks along the wall show.
hensive option which is in place in numerous countries. And as long as the risk
community generates an adequate premium volume, sufficient capacity should
be available to cover losses from extreme
flooding and secure the economic viability
of a region exposed to flood risk.
Once a risk community has reached the
scale needed to share the loss burden
across a sufficiently large population, insurance premiums work out to be considerably more reasonable, with prices becoming affordable for both low and highly
exposed risks. The illustration below
shows this in a simplified form for river
flood risk. The average premium for a
broad-based risk community can be 20
times lower compared to a solidarity
community that is restricted to risks in the
most exposed zone. Additional differentiation of premiums by exposure and the
introduction of policyholder deductibles
in a broad-based risk collective would
enable most of the population to participate at reasonable premium rates.
This figure shows the development of the risk premium when the property insured is successively less exposed. If all property were insured at
the same price, the premium would be 0.2 . However, if insurance were limited to property in the 100 to 500-year risk zone, the premium would
be ten times as high, ie 2.2 . This example demonstrates that compulsory insurance at a standard premium rate requires considerable solidarity
from those insured parties who are less seriously at risk. This situation could be partially mitigated by a slight graduation of the premium in line with
the actual risk.
Regulated tariff
flat premium
Bundled / Compulsory
Free market
risk adjusted
Switzerland
France
Spain
UK
Private
Public
Australia
US NFIP
Germany
Optional
National flood insurance models generally fall into one of the four categories: public and optional
(United States), private and optional (Germany), private and bundled (United Kingdom), or public
and bundled (France). Spain, France and Switzerland all have compulsory insurance schemes.
Since risk prevention and risk transfer go hand in hand, the most effective
flood insurance schemes are those which involve an active and continuing
relationship between the insurance industry and the relevant government
agencies responsible for flood protection.
structuring direct insurance and reinsurance cover with sufficient scope, and
spreading the risk through all forms of traditional and non-traditional reinsurance
solutions are invaluable assets offered by
the insurance industry. But insurers cannot do it alone. Since risk prevention and
risk transfer go hand in hand, the most
effective flood insurance schemes are
those which involve an active and continuing relationship between the insurance
industry and the relevant government
agencies responsible for flood protection.
These can take various forms, as described earlier. But each has its advantages and disadvantages. One of the primary
problems with the optional flood coverage approach is that it does not effective-
But the good news is that up to 65% of expected losses can be averted cost-effectively
To give local decision makers the facts they
through measures that have net economic
need to design a cost-effective climate adapbenefits! These include flood awareness camtation strategy, Swiss Re together with
paigns, emergency response training, imother public and private partners developed
provement and repair to Hulls existing sea and
a practical methodology on the economics
river defenses, and mobile protection for
of climate adaptation (ECA). It quantifies the
household contents through provision of large,
overall risks faced by local communities and
waterproof, re-sealable bags to residents.
assesses the costs and benefits of various adaptation measures in their area. In so doing,
the ECA approach seeks to pro-actively manInsurance is a less costly option than many
age total climate risk based on a rigorous
other physical prevention measures; it constirisk assessment. It assesses total climate risk
tutes an important component of the citys
in a given location, taking into account the
adaptation portfolio to protect assets against
risk presented by todays climate, the economic
the impact of high-severity, low-frequency
development paths that might put greater
flood events.
population and value at risk in the future and
the additional risks driven by
climatecost
change.
Adaptation
curve for Hull, UK
climate change
scenario
In a second step, the ECA High
approach
proposes
a prioritized portfolio of adaptation measures
to address total climate risk in the most economically sensible way.
6.0 Cost/benefit
5.0
~65% of total expected loss
can be averted cost-effectively
4.0
3.0
Adaptation
cost curve for Hull, UK
High climate change scenario
2.0
The cost curve shows that 65% of the loss can be cost-effectively
averted by prevention measures, such as flood awareness campaigns, sea defences, sandbagging and improved drainage systems.
Insurance covers another 15% of the expected loss and is more
cost-effective than many other prevention measures.
1000
1100
Averted loss (USD m)
900
850
Insurance
1000
1100
Averted loss (USD m)
Closed cell insulation existing buildings Closed
4.80 cell insulation existing buildings 4.80
900
750
550 700
300
850
Insurance
50
2030, total
expected loss
Incremental increase
from climate change
750
Incremental increase
from economic
growth; no climate
change
2008, todays
potential loss
0.0
1.0
550 700
2.0
3.0
4.0
71%
56
0.0
6.0 Cost/benefit
0
50
300
5.0
Potential impact
from change in climate
23
1.0
96
17
Non-traditional solutions
Flood insurance for homeowners on a
countrywide basis is one form of protection
that insurance companies can offer. But
the range of solutions is much broader
and includes parametric reinsurance, micro insurance and insurance-linked securities (ILS).
With parametric re/insurance or capital
market solutions, the payout in the case
of a loss is determined by a physical trigger or an index, not by the actual loss incurred. But to set up parametric solutions
for flood is quite complex, since flood
has so many facets. A parameter used to
measure rainfall, for example, might not
be suitable to cover other types of flood
like a river flood or a dam burst. In addition, precipitation might occur far away
from the area that will actually be inundated. Hence, it is important that each
solution is custom-made and specifically
designed to the needs of the insured.
But parametric solutions have great advantages: They do not require loss adjusters to tally damage after a catastrophe
occurs, a process that can take months or
even years and which can delay a payout.
A parametric trigger is transparent, both
for the insured and for insurers, and it
means that loss events can be handled
faster and more efficiently than with
other kinds of insurance-based solutions.
Basis risk is the biggest challenge for
parametric solutions. It is the risk that the
actual payout for the insured party in a
specific loss event is lower or bigger than
the actual loss incurred. However, there
are means to reduce basis risk. The best
way to do so in the case of parametric
flood solutions is the use of flood footprints
which outline those geographic areas
that are actually inundated. Remote sensing has greatly advanced this capability.
The number of satellites and their resolution has increased in a way that detailed
footprints for flood events can be determined. Flood detection is mainly done by
radar sensors which operate day and
night and penetrate cloud covers.
Another innovative approach is the use
of micro-insurance. In 2011, Swiss Re
helped implement a hybrid solution that
combines a parametric and basis risk
insurance cover for micro-entrepreneurs
in Haiti through the Microinsurance
Catastrophe Risk Organisation (MiCRO).
It protects against rain, wind and earthquake risks. The rain cover is based on
rainfall measurements using satellite data.
That has the advantage of being less
susceptible to manipulation. The policy
was triggered twice during the summer
of 2011 after heavy rainfalls struck Haiti.
Public-private partnerships:
the role of government
The task of effectively reducing and
financing catastrophe risk requires a
combined response by both private
and public sector players. While the
public sector plays a key role in setting
a legal framework that enables the development of a private insurance sector,
its the primary role of private insurers
and reinsurers to develop appropriate
risk transfer solutions and to absorb and
manage those risks most effectively.
But in developed countries with a functioning insurance market, there is no
need for the government to actively absorb natural catastrophe risks. In countries where the insurance market is not
yet sufficiently developed, the government may need to play a more active
role as an enabler of risk transfer. In addition, governments themselves may
choose to buy private insurance coverage in order to pre-finance public disaster expenses.
Governments as rule setters: The
public sector has the political and legal
power to set rules and regulations that
enable the insurance market to absorb
large losses. These include setting
capital and licensing requirements for
insurers, providing access to inter
national markets, defining the terms
of liability, supporting preventive measures, etc. In some situations, governments can help expand the availability
of risk transfer solutions to individuals
and corporations by introducing compulsory insurance schemes to create a
sufficiently large risk community. In
many cases, the public sector and the
insurance industry are implicit partners.
Insurers will only insure against floods
if the government implements flood
prevention measures or against fire if
fire brigades exist.
Governments as sponsors and
facilitators of an insurance market:
Where an insurance market does not
yet exist as is often the case in
developing and emerging markets
governments and non-governmental
organisations can play an important
role in facilitating the development of
risk transfer solutions. This may involve
collecting exposure data and supporting risk research and modelling to enable new insurance solutions. In addition,
governments can encourage the development of an insurance market by
initially subsidising insurance premiums.
Main hazard(s)
Insurance carriers
Insurance cover
Insurance penetration
Australia
Inland and coastal river
Various insurers offer flood
floods; flash floods; low storm insurance, both personal
surge risk
lines and commercial lines
Canada
River floods (esp. due
No flood cover offered to
to melting snow and heavy
homeowners
rainfall); flash floods;
low storm surge risk
Germany
River floods; flash floods;
Only private insurers offer
substantial storm surge risk
flood cover
North Sea coast
Switzerland
River floods;
State monopoly in 19 of 26
flash floods
cantons; private insurers cover
content and business inter
ruption (BI) in cantons with
state monopolies. They cover
buildings, content and BI in
other cantons.
UK
Storm surge; widespread
Only private insurers offer
inland river floods rare;
flood cover
flash floods may follow heavy
rainfall
US
River floods; flash floods;
National Flood Insurance
storming surges following
Program (NFIP) for basic cover
hurricanes
in areas exposed to flood risk;
private insurers offer additional
cover
Practically 100%
Residential risks:
95%; Industrial risks:
almost 100%
Residential risks:
medium in NFIP risk areas;
Industrial: high in risk-areas
Source: Swiss Re
formed by eight shareholders in the re/insurance industry. PERILS aggregates industry-wide exposure and claims data for
Europe. That improves the transparency
of industry losses.
There is a strong demand from governments and municipalities for such
innovative solutions as they seek advantages such as cost efficiency, speed
of payments and moral hazard.
Aerial view of a residential area in Milton, a suburb of Brisbane, during the Great Brisbane flood of 2011. This was the worst flooding
disaster in Australias history. The image includes a submerged parkland.
Conclusion
Flooding could affect any of us, taking
away our belongings and destroying our
homes. With a good insurance cover,
however, flooding does not have to turn
into a disaster at least not financially.
But as discussed in this publication, flood
insurance is often not widely available
or affordable, despite the fact that there
is no reason for this as long as the basic
principles of insurance are met.
What is important is that all participants
have to play their part and contribute
to a sustainable solution. That means that
the government has to set the rules and
guidelines for insurance schemes. It must
also actively promote and implement