Insurers running to flood, not away from it

The impacts of Covid-19 and a faltering global economy mean the insurance industry is facing unprecedented headwinds. So now more than ever, it’s crucial to tap into new risk pools and seize fresh revenue opportunities when they come along. And when it comes to flooding, there’s more than enough business to go around, says Matt Junge, head of property solutions for US and Canada at Swiss Re.

Giant-Sized Opportunity

Consider these numbers: $2.6bn in California, $1.3bn in North Carolina, and $1.1bn in Florida.

Those are the premiums insurers could stand to make in each of those states, according to research recently commissioned by Swiss Re. Across the lower 48 states, the research pegs the market opportunity at nearly $38bn. With those kinds of numbers and reliable modeling, it’s time to get in the game.

Until now, the inability to effectively underwrite and price flood risk left insurers reluctant to offer coverage. Every time it rains, we are reminded of the consequences of inadequate data and undercapitalization. An average year’s worth of storms can produce uninsured flood losses of $10bn, compared to insured losses of $5bn, according to the Swiss Re Institute.

“The research pegs the market opportunity [in the US] at nearly $38bn…with those kinds of numbers and reliable modeling, it’s time to get in the game”

But that’s all changing. Flood modeling has improved exponentially, allowing insurers to offer enhanced protection to their customers with confidence. Underwriters are no longer limited by historical experience and rating tables. It’s now possible to rate individual risks thanks to the existence of high-resolution data, which means an insurer can offer flood coverage on the same dwelling that’s covered by a homeowners policy.

These advances have led to the emergence of flood insurance in the private market – a win for consumers – and more confident risk assessment – a win for insurers.

Reconsidering the Flood Threat

Flooding used to be considered someone else’s problem. Television reports showed people paddling boats down their streets past barely visible rooftops, and it all felt distant and remote. But that’s no longer the case; flooding is everyone’s problem.

The issue is often manmade, and it’s exacerbated by natural forces such as more frequent volatile weather. Consider the massive mixed-use developments, which are no longer common only in urban areas but in suburbs and smaller communities.

With all that concrete, where does the water go when it rains? Couple that with atmospheric rivers that produce torrential rain and storm surge, and very little of the United States is spared from flooding these days, as the cost grows and vulnerability increases.

“Every time it rains, we are reminded of the consequences of inadequate data and undercapitalization”

Most natural catastrophe risks remain uninsured, contributing to a large protection gap. This leaves households, businesses, and economies vulnerable to potentially catastrophic losses. As long as the effects of climate change continue, there will be demand for flood coverage.

Opportunity Everywhere

Another way to define the flood insurance gap is to consider that only one in six homes in the United States has flood insurance. Many people think they don’t need it. Others assume their homeowners policy covers it. Still others believe they can’t afford it.

Where reliable risk assessment and potential healthy return goes, capital will follow. Carriers in just about every region of the country are recognizing this significant commercial opportunity and have begun offering flood coverage to their customers. In addition to the states mentioned above, the risk is real in virtually every region, as evidenced by the market gap in many regions (see box-out top right).

Better Data, Higher Confidence

Insurers are getting in the flood business because they know their customers better than ever. They’re constantly receiving information on those customers – data that can be unlocked for growth. Using that data wisely, they’re providing coverage that people desperately need at a fair price and making it easy for consumers. It’s a recipe for greater profitability and increased loyalty.

Consumers are noticing, too. Insurers are seeing brisk take-up rates on flood-eligible new business as customers become aware of their susceptibility to flood damage; and because the price more accurately reflects the risk, they’re now making the smart decision to purchase the coverage.

When disaster strikes, insurance is a first responder. Flood has been an exception, until now. Reliable modeling, accurate pricing and fresh capital create a compelling case for profitable growth. The path is now cleared for (re)insurance to facilitate the building of resilient communities.