Insurance against risks associated with the weather using parametric models is becoming an increasingly common practice. Because it covers against the occurrence of an event rather than the degree of physical harm, it is a more cost-effective solution for risk transfer. However, a lack of data has made it difficult to apply the parametric method to flooding, which is the natural disaster that occurs most frequently and costs the most money in the United States.
A flood has occurred in almost every county in the United States at some point. In spite of their prevalence, floods are notoriously tricky to track, which makes obtaining parametric insurance for flooding an extremely difficult task.
Taking readings from stream or tidal gauges to determine the height of the water is the traditional method for monitoring floods. However, the expert in parametric insurance Peter Lacovara, who is depicted above, stated that this strategy left a lot to be desired.
The problem with monitoring floods with the use of a stream gauge is that it only provides information about the level of the water in a single spot. “But if you don’t have a gauge elsewhere then, then you don’t know where the water is,” said Lacovara, who is also the head of advertisements at Cloud to Street (C2S), a climate adaptation software business that offers accurate and near real-time intellectual prowess on flooding. C2S is a company that provides this type of information.
“Despite the fact that the United States has more stream, river, and tidal gauges than perhaps any other country, they are nevertheless extremely dispersed throughout the country. He used the phrase “in many cases, they’re miles apart” to convey the point.
“Floods can occur in regions where there is a possibility that you will not find a stream gauge. It’s possible that there are only one or two stream gauges in the area, yet the flood might encompass several hundred square kilometers.
The technology provided by C2S assists insurance companies in better understanding and underwriting flood risk, as well as in monitoring flood occurrences as they occur. The information technology company with headquarters in New York City draws flood data from a variety of sources, such as satellites, historical flood maps, and on-the-ground intelligence. It does this through the use of machine learning, which provides interpretations of the data as well as insights into the scope and impact of floods.
Lacovara elaborated on the ways in which C2S is distinct from conventional methods of flood modeling, saying, “Conventional flood modeling is carried out utilizing a stochastic method: you develop a model that says water flows to the lowest place.” If you want to get an idea of what a flood is going to be like, you can take a digital elevation model and run a bunch of simulated water through it. This will give you an estimate of how bad the flooding will be. The model will be completely inaccurate, however, if you do not take into consideration occurrences such as the breaching of levees or sudden drainage.
“Cloud to Street is able to travel through the archives of the past and show you exactly what that flood looked like,” the company says. When we look at the history of flooding, rather than looking at where a model predicts the water will go, we look at the real footprints that floods have left behind and where the water has gone.
Insurers can have the capacity to price risk and a better understanding of the possibility of a flood event if they have access to improved flood data. According to Lacovara, “when you have a library of tens of hundreds or hundreds of thousands of floods – genuine flood footprints,” it provides us with a rigorous method of pricing the risk.
In order to identify whether or not an event had place, a parametric product also requires an index value. Real-time satellite data from C2S can tell underwriters whether or not the flood occurred and to what extent it affected a region. This information is necessary for underwriters, who need to know whether or not the flood occurred.
Assisting the farmers of Colombia
In order to build out the world’s first at-scale parametric flood insurance program in Colombia, C2S has formed strategic partnerships with the parametric insurance platform Raincoat and the major reinsurer Munich Re. The national program is the first parametric flood program specifically designed for climate adaptation, and it will make coverage available to more than 100,000 smallholder farmers.
The data provided by C2S assisted in the process of establishing the particular parameters for flood risk in order to produce fair and comprehensive parametric policies. Because parametric insurance does not require an in-person assessment of damages to trigger a payout, insured farmers in the Colombia program can obtain financial help within days of a flood disaster without being required to file a claim. This allows insured farmers to receive aid more quickly.
Because of this, Lacovara sees parametric insurance as the appropriate answer for filling coverage gaps in nations that are still growing. “Regular flood insurance requires a significant amount of underwriting information. In order to assign a value to the danger of flooding, it is necessary to have knowledge of the materials from which a house is constructed, the frequency with which flooding occurs, and the likelihood that a property will be damaged.
It can be exceedingly difficult to obtain basic underwriting data in countries that are still in the process of developing. We don’t care what the underlying asset is when it comes to parametric insurance, whether it’s a little residential building or a massive industrial complex. “I’ll explain it to you like this: Parametric is only concerned with the possibility of the occurrence itself,” he said.
One more obstacle associated with providing indemnity insurance is the complexity and expense involved with modifying claims after an event has occurred. When flooding strikes rural areas or underdeveloped nations, it may take days or weeks for a claims adjuster to survey the actual damage and determine how much it would cost to rebuild. According to Lacovara, 17 years after the catastrophe, millions of dollars’ worth of outstanding insurance claims resulting from Hurricane Katrina have still not been fully adjusted in the United States.
“A significant number of those claims are the result of floods that were brought on by breached levees in the New Orleans region. “Insurers would have been able to settle those claims in as little as two to four weeks had the capabilities of satellite flood monitoring been available,” he continued.
Filling in the blanks in United States coverage
In the United States, filling gaps in flood coverage using parametric insurance is becoming an increasingly viable option thanks to the availability of tools such as Cloud to Street. “We have more insurance in the United States than anywhere else in the world, yet we’re still significantly under-insuring flood,” Lacovara said to Insurance Business. “We have more insurance in the United States than anywhere else in the world.”
Only four percent of homeowners in the United States have flood insurance, according to the consulting firm Milliman in the United States. The National Flood Insurance Program, which is overseen by the Federal Emergency Management Agency and is the primary source of the insurance, is responsible for their distribution (FEMA).
According to Lacovara, the difference will not close since it is difficult and expensive for carriers to assign a value to the risk of flooding. Traditional indemnity insurance can only provide coverage, albeit at exorbitantly expensive premiums, to persons who live in high-risk locations or who have previously been affected by catastrophic flooding. This is the only option available to people in these situations. A technological advancement such as Cloud to Street has the potential to enhance the quality of underwriting data for traditional insurers while also increasing the profitability of parametric insurance for a wide variety of climate-related risks.
“C2S can enable deeper understanding of where actual historical flood zones meet with conventional flood zones specified by FEMA,” the Center for Climate and Security said. Lacovara made the observation that there are regions that are not classified as flood zones yet nonetheless experience frequent flooding.
“There is currently a thriving marketplace for earthquake and hurricane [parametric insurance], and there is also a business that is forming for convective storm and hail risks. Because of the issue with the data that we discussed, flood is the only remaining option. C2S is able to give the whole ecosystem of information required by insurers in this country in order for them to expand flood insurance coverage.