So how can a scientist’s perspective on flood help the insurance industry better prepare for this risk?

Dr. Petr Puncochar from Aon’s Impact Forecasting team tackles the topic by clarifying some common flood misconceptions between scientists and insurance professionals, explaining the pitfalls and benefits of modeling tools and, most critically, outlining the key opportunities to better understand this risk and build a more resilient future.

1. A flood is never just a flood: understand the basic hazard concepts

2. Don’t be fooled by magnificent maps: pick the right tool to boost

your flood risk understanding

3. Flood insurance buying is in your hands: use knowledge to boost your

customers’ protection

4. Join the model evolution from reinsurance to regulation: don’t

miss out on these strategic tools

5. Climate change and the protection gap are buzz words for a reason:

turn flood threats into opportunities for resilience and growth

Eighth article, October 2018

The risk of flood is prevalent all over the world, having caused almost USD550 billon of global economic damage over the past decade and

leaving a huge impact on society. Although we can never fully protect ourselves from flood, the insurance industry plays a critical role in working with governments, businesses, and families to build resilient communities while underwriting profitability.

Global Insurance Market Opportunities A Scientist’s Guide to Insuring Flood: 5 things you need to know By Dr. Petr Puncochar

About the GIMOSince its launch in September 2015, the Global Insurance Market Opportunities report has quickly become a leading thought leadership study and reference document for the re/insurance industry.

In 2018, we are taking a new approach to its distribution by publishing articles throughout the year under the banner of Global Insurance Market Opportunities, rather than launching the single, compre-hensive report. In so doing, we aim to increase its utilization, bring our ideas to market as fast as possible to support further development with our re/insurance client partners, and make it easier for GIMO readers to digest the wealth of content generated annually.

1. A flood is never just a flood: understand the basic hazard conceptsDespite many classifications of flood one fact remains common: it is a complex peril that takes four key forms – riverine, rainfall flooding, storm surge, and tsunami – which can occur simultaneously in extreme situations. Plus floods are often triggered by other perils such as earthquakes and hurricanes.

Riverine (fluvial) flooding is the most recognized type of flooding following an increased discharge and/or water level. Spatially, riverine flooding can occur both locally and across entire continental basins – such as in Thailand in 2011, which remains the number one economic and insured flood loss in history. Flood models tend to solely focus on riverine flooding, but can be combined with other types, such as pluvial flooding or storm surge.

Rainfall (pluvial, flash) flooding is caused by intensive rainfall, and is usually a short duration, which makes it difficult to predict and strongly limits its mitigation. Its accuracy today is significantly less than modeling the riverine hazard. Pluvial flooding in 2009 killed over 120 people in the normally arid area of Jeddah in Saudi Arabia.

Storm surge is the most common type of coastal flooding that is caused by a combination of low air pressure, water level uplift due to shear wind, high tide, and oscillating waves. Examples include the 1953 Netherlands event, which killed 1,836 people and caused widespread property damage, and the storm-surge caused by Hurricane Sandy, which impacted New York City in 2012.

Tsunami is a major threat to people living on coast with the overwhelming majority resulting from seabed displacement caused by earthquakes or submarine landslides. Recent tsunamis include the Boxing Day Tsunami of December 26, 2004 in the Indian Ocean, and the Tohoku tsunami from Japan in 2011.

So why is understanding this important? Insurers can use flood hazard knowledge to choose the correct tools to evaluate the risk and understand the nuances of the model outputs. Each flood type should be

independently reviewed when setting or

reviewing primary or reinsurance contract

wordings.

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A Scientist’s Guide to Insuring Flood: 5 things you need to know

Economic Loss – Top 10 Flood Events

Month/Year Region Location Economic Loss (Inflated USD Billions)

Jul 2011 APAC Thailand 49.9

Jul 1998 APAC China 46.8

Jun 1993 United States United States 36.4

Jun 1953 APAC Japan 29.9

Jul 2016 APAC China 29.2

Jul 2010 APAC China 28.7

Aug 2002 EMEA Central Europe 27.7

Aug 1995 APAC North Korea 24.6

May 2013 EMEA Central Europe 23.7

Jul 1931 APAC China 23.2

Source: Impact Forecasting

Insured Loss – Top 10 Flood Events

Month/Year Region Location Loss Loss (Inflated USD Billions)

Jul 2011 APAC Thailand 17.2

Jun 2007 EMEA United Kingdom 7.2

Aug 2002 EMEA Central Europe 4.5

May 2016 EMEA Central Europe 4.1

May 2013 EMEA Central Europe 3.8

Aug 2016 United States Southeast, Midwest, Plains

3.6

Jun 2008 United States Midwest, Mississippi Valley

2.9

Dec 2011 APAC Australia 2.8

Aug 2005 EMEA Central / Eastern Europe

2.4

Jun 1993 United States Midwest, Mississippi Valley

2.2

Source: Impact Forecasting

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A Scientist’s Guide to Insuring Flood: 5 things you need to know

Flood frequency

A flood’s return period, or frequency,

represents the likelihood of an event reaching

or exceeding such a threshold within a certain

period of time, with frequency being the

return period’s inverse value.

In re/insurance, one must pay attention to

differentiate between the return period of

flood hazard (most commonly the flow)

reached at one point of the river network, and

the return period of flood loss that assigns the

extremity of the financial cost of a flood event.

Let’s use the example of flooding in Central

Europe that impacts five countries. The

combined return period of loss is assumed to

be around 30 years; however, some observed

flow values in Northern Austria exceeded 1,000

years as the return period of flood hazard is

different at every segment of the river network.

So why is understanding this important? A lot

of misunderstandings have occurred during

discussions between re/insurance experts and

hydrologists, and so there always needs to be

a consensus.

2. Don’t be fooled by magnificent maps: pick the right tool to boost your flood risk understandingDozens of tools, datasets, and solutions exist

that claim their absence will lead to substantial

flood losses or bankruptcy! Finding a toolkit for

effective flood risk management can be tricky

and requires knowledge of key principles,

what exactly certain data represent, and the

limitations. Below is a shortlist to help clarify

the different options when choosing the most

effective tool for a re/insurer’s objectives:

Flood hazard maps are gridded datasets that

show the spatial extent of flooding. These help

to clarify which location/policy is floodable at a

certain return period and by what flood

hazard. Impact Forecasting provides sets of

flood hazard maps with return periods of 1 in

20, 50, 100, 250, 500 and 1,000 years. For

example, insurers can use its Thailand flood

hazard maps to check the 1-in-100-year flood

hazard for every location in Thailand and

adjust premium accordingly.

Probabilistic catastrophe models are

complex tools that quantify portfolio losses on

synthetically generated realistic events.

Traditionally used for reinsurance, the models

have many additional uses, including detailed

single risk assessments by insurers and

simulating losses to understand the broader

economic exposure for organizations such as

governments, non-governmental

organizations, and corporate companies.

Flood risk maps are a product of probabilistic

catastrophe models and show the relative

average annual loss (AAL) in each model grid

cell. Relative AAL indicates the pure premium

which needs to be charged to achieve a

balanced flood portfolio. There needs to be

sets of risk maps for different physical policy

characteristics.

Underwriting platforms support primary

underwriting by overlaying a single policy over

a flood hazard or risk map and accessing the

underlying hazard or risk value. Some platforms

allow accumulation analyses to evaluate

underwriting strategy on an entire portfolio.

Underwriting platforms could exist as a stand-

alone application or as a web-based system.

Loss calculation platforms provide the ability

to run any catastrophe model through Monte-

Carlo simulations and estimate financial loss

based on an entire insured portfolio. Platforms

must be robust enough to apply all possible

insured conditions, provide detailed results, or

analyze modeling uncertainties.

True or false? These maps both claim to show a 1-in-500-year flood hazard map representing riverine flooding in Canada. However, the image on the left is calculated via a simplified methodology and based on crude spatial data so has grossly overestimated the flood risk. The image on the right provides a more credible representation, based on a higher terrain resolution and advanced hydro-dynamic simulations. Through more detailed modeling such as this, inhabitants avoid being charged very high premiums or being refused any insurance protection at all.

Case study: How accurate are these modeling outputs? There can be substantial differences in flood hazard maps for the same location due to

different methods and datasets. People tend to trust outputs of mathematical simulations,

particularly if it is nicely visualized, but these can be misleading and need to be de-mystified.

The accuracy highly depends on the underlying hydrological and spatial data, which

methods were used to model the hazard, and what flood type the output represents.

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A Scientist’s Guide to Insuring Flood: 5 things you need to know

3. Flood insurance buying is in your hands: use knowledge to boost your customers’ protectionThere is a surprising fact: everyone knows

what flooding means, but the results of several

questionnaires (including one example

conducted for the National Flood Insurance

Program) in the U.S., show only a minority of

people know if their insurance covers this peril

and if so, what specific type. This situation has

resulted from a range of contract wordings

that insurers have developed in various

geographies over the years. These often limit

protection to specific and rare types of flood

losses, such as sewage back-up policies in

Canada or extremely low limits in Austria that

rarely cover the costs for a basic clean-up. This

has led to a large difference in flood insurance

penetration in various countries or even

individual regions. For example, in Germany,

Bremen has only 19 percent penetration, but

Baden Wuerttemberg reaches 94 percent.

In many countries, such as the Netherlands and

recently Canada, flood insurance has either not

been available or has been absent for key

occupancy lines, passing substantial risk to

local government. This has changed in Canada

after significant flooding in 2013 which created

opportunities for insurance companies to offer

comprehensive products.

For markets where flood insurance exists,

including Switzerland and France, country-

wide policies still use the flat tariffs regardless

of where the insured risk is located.

Meanwhile, in markets such as Austria,

Australia, Canada, and the U.S., we have seen

more advanced systems providing guidelines

on avoiding the highest risks, and providing an

indication of the flood premium to be charged.

In general, the higher the flood insurance

penetration, the more advanced systems are

applied by insurers to understand and price

the flood risk.

Based on recent serious flood events in Europe

(2002, 2005, 2013), the U.S. (2005, 2012, 2017,

2018), Australia, Japan and Thailand (2011) and

Canada (2013), families, communities, and

companies are increasingly demanding a

holistic weather risk insurance protection.

Now is the right time for the insurance

industry to step-up and start offering this

comprehensive flood cover – without taking

significant additional risk – based on advanced

analytical tools, to increase insurers’

underwriting confidence.

4. Join the model evolution from reinsurance to regulation: don’t miss out on these strategic toolsSince the 1990’s, the use of catastrophe

models has evolved from reinsurance buying

to shaping insurers’ strategies and enterprise

risk management. Due to the ever-increasing

value of modeled results – resulting from more

granular data, advanced technology, and

skilled modelers – these analytics are now

reviewed and assessed by global rating

agencies and regulators of financial markets.

For example, EIOPA’s Solvency II regulation

requires companies to hold solvency capital

to withstand a 1-in-200-year loss, stating:

“The use of catastrophe models can help to

decrease the solvency capital requirement and

provide better flood risk understanding which

can be potentially optimized.”

Similar strategies, often called and judged as

Solvency II equivalents, now exist in multiple

countries, such as Japan, the U.S., Bermuda,

Australia, and many others. From a scientist’s

perspective, it is encouraging to see the

influence of catastrophe models is spreading as

a strategic part of an insurer’s toolkit.

However, the key learning to keep in mind is

where multiple flood (or other catastrophe)

models exist, the user faces an important

decision over which model to select for their

needs, and which best reflects their firm’s own

view of risk. Advanced expertise or model

evaluation is crucial before making any

decisions or ‘blending’ several model outputs

into one exceedance probability curve. Again,

the exact knowledge of model coverage is

essential to make sure all aspects and missing

flood sub-types are handled correctly, and the

purchased protection is effective and reliable.

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A Scientist’s Guide to Insuring Flood: 5 things you need to know

5. Climate change and the protection gap are buzz words for a reason: turn flood threats into opportunities for resilience and growthMitigating the impacts of climate change

The insurance industry, as a key risk transfer

mechanism, can partially manage the negative

effects of climate change by offering products

to increase insurance penetration and build

appetite, while using data and analytics to

better understand the risk.

Rising temperatures and changing spatial and

temporal patterns of rainfall can significantly

alter hydrological cycles and flood regimes

across the globe, although the impacts differ

substantially from region to region. Studies

have shown that the increase of flood

frequency and intensity could be likely in

regions such as Southeast Asia, India, and

Eastern Africa. Increased risk of flash flooding

associated with summer storm rainfall has been

seen across developed countries in North

America and Europe. Rising sea levels also pose

a significant threat for low-lying regions

through enhanced coastal flooding risk.

Jakarta, with its soil subsidence, is fighting

against time to complete a large construction

project to protect the city from increasing

storm surge risk.

Increased flood risk is not necessarily

connected to changes in annual rainfall

amounts, but rather to its distribution

throughout the year. For example, developed

markets such as the U.S. and Europe face a

probable increase in the amount of

precipitation falling during extreme rainfall

events, but on the other hand, prolonged

rainfall deficits are observed and projected.

However, it is always worth noting that global

increases in flood-related insured losses cannot

be attributed solely to climate change. Socio-

economic changes, such as population

increase, economic growth, and in-floodplain

development are among the main drivers of

rising global catastrophe losses.

Flood insurance can locally become less

available or affordable, particularly in the most

exposed regions. The fact that the largest

protection gap now exists in regions most

prone to severe future impacts signifies an

important challenge for various stakeholders,

including local governments. Access to flood

insurance will be determined not only by

changing risk, but also by adaptation measures

and the way in which societies ensure

sustainable socio-economic development.

Bridging the Protection Gap: the role of flood models

Probabilistic catastrophe models and their

underlying data hold key information about

hydrological and flood regimes – therefore

offering analytical tools that could trigger new

insights and product opportunities. This is of

vital importance in many developing countries

with insufficient insurance penetration – and

even in more mature markets such as the U.S.

where we saw a lack of flood insurance after

Hurricane Harvey.

Models will be a key starting point for

governmental schemes and public-private

partnerships to provide reliable and long-term

insurance protection. In addition, with the

increasing popularity of parametric insurance

and insurance linked securities, catastrophe

models are increasingly being used to not only

design the parametric triggers for specific

programmes, but also provide related pricing.

Some final take-aways…• Always remember that flood, as an extreme natural phenomenon, will have modeling limitations, but understanding these will unlock more

meaningful insights.

• There is a plethora of solutions for effective flood loss modeling and quantification but companies that invest in their understanding of each

product’s strengths and limitations – plus how the tools fit into their existing workflows – will benefit from a strategic advantage.

• Even if there is no flood product for your territory, models today can be efficiently developed and tailored to your individual needs to ensure

that you can take a more scientific approach to understanding and mitigating against this risk.

• There is an ongoing trend in the insurance industry to offer a broader, more holistic coverage for homeowners and businesses – but it does

not have to bring additional risk if it is efficiently quantified via modern analytical solutions.

• Flood maps and models have many more uses than often described: keep an open-mind to discover a host of new opportunities where

science can help achieve growth for insurers while building more flood-resilient communities.

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A Scientist’s Guide to Insuring Flood: 5 things you need to know

Notes:

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A Scientist’s Guide to Insuring Flood: 5 things you need to know

Notes:

A Scientist’s Guide to Insuring Flood: 5 things you need to know

About Aon Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.

© Aon plc 2018. All rights reserved.The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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About the Author:Dr. Petr Puncochar is responsible for Impact Forecasting’s international flood model development. Achievements include implementing new workflows and methodologies, delivering flood projects in new territories and building links between academic/technical expertise and re/insurance industry. Additionally, Petr provides general methodological and technical insights on hydrology, open channel hydraulics, geographical information systems and remote sensing systems. Petr has a PhD in hydrology and open-channel hydraulics from the Czech Technical University.