The U.K. Floods: Looking Forward – Building Better Resilience

Over the past few weeks we have examined the impact of the floods in the U.K. last December on the re/insurance industry and whether we should expect more flooding in the future. We now turn to:

  • How best to protect communities from flooding
  • Consider how modelling could be better used to forecast areas at high risk of flooding
  • Examine reinsurance solutions to protect against earnings volatility

Resilience Is Key

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U.K. Floods

This article is the third in a three-part series about flooding in the U.K.

As we continue to anticipate flooding in the U.K., which as an island is susceptible to the natural phenomenon, the question is raised over how we can better prepare ourselves for the future. Flood defences are one answer in which the U.K. government is investing.

Expenditure on flood defences is forecast to exceed £6.5bn from 2005 to 2015 which, the Environment Agency (EA) estimates, will reduce the level of flood risk for 500,000 properties. By 2020, new flood defence expenditure is expected to reduce flood risk for an additional 300,000 homes.

The benefit from additional defences was in evidence from the record-breaking storm surges in December 2013, where the EA estimates that 110,000 properties were defended in Hull and tens of thousands more along the Lincolnshire coastline.

Given the large urban areas susceptible to coastal flooding the economics of deciding where to invest money has led to significant capital projects that clearly do pay off. However in smaller towns, hit by recent extreme river and surface water flooding, the question of how best to protect these communities remains somewhat unanswered.

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Ultimately, there will always be a residual risk, even where defences are built. This was demonstrated for many unfortunate residents in Carlisle who saw their livelihoods flooded even when their properties were located behind newly constructed defences.

Local resilience measures can then be an alternative to mitigate the impact from flooding and would ideally be incentivised via the reward of lower premiums. A Cockermouth example embodies this where, having been flooded in 2005, a business was up and running again in three days after the December 2015 floods. This was following measures taken to build a steel and concrete wall protecting the premises.

How Can Better Modelling Assist in the Run-Up to Major Events?

The insurance industry has access to various underwriting and forecasting flood modelling tools that can detect areas at risk when underwriting and in the run-up to major events.

For underwriting, a multi-model approach allows for taking multiple views of risk into consideration—important given the complexities and subjectivities involved. Immediately before a flood event, use of warning datasets can potentially be used to increase the resilience of policy-holders and help insurers better anticipate the operational impact from flood claims.

During the December 2015 events, for example, Willis Re provided Environment Agency flood warning areas, via the online mapping platform SpatialKey, alerting insurers to the potential of flooding in Carlisle, for instance 6-12 hours before the peak floods. These tools are likely to improve and become more valuable over time to help mitigate or even prevent the devastation caused from flooding.

How Reinsurance Can Help Insurers Mitigate The Financial Impact To Flooding

Willis Re observed through our risk appetite survey that 77% of insurers consider an earnings metric to be the most important criteria when evaluating the value of reinsurance and risk appetite within the business. Indeed, Willis Re currently places £2.5bn of reinsurance limit protecting against earnings deterioration from events such as the December 2015 floods, for which traditional ‘event-based’ reinsurance offers only limited protection.

Reinsurance solutions to protect earnings, on an aggregates basis, are evolving to meet insurers’ needs, varying from single line of business covers to more holistic covers protecting multiple lines of business.


 

Michael Thomas Guest blogger Michael Thomas is Catastrophe Analyst for Willis Re. With the company since October 2013, Michael is based in the U.K. team working on delivering Catastrophe Analytics U.K. and European clients. Before joining Willis Towers Watson, Michael worked as a Catastrophe Risk Analyst at a Lloyd’s syndicate.

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