Recent events have driven flooding up the political and risk management agenda. Dr Justin Butler examines what insurers and reinsurers can do to address the issue.
This year’s summer floods in the UK alone are estimated to have cost the insurance industry in excess of £3bn according to the ABI. These losses are unlikely to be a one-off as climate change will increase the probability of flood events of this magnitude occurring again and again.
Climate change is predicted to cause significant changes to rainfall patterns, increasing the likelihood of high intensity rainfall events. It will also cause rapid sea level rise, which will lead to higher storm surges. Not only will the impact of flooding increase in current flood risk areas, but a greater proportion of many countries will be exposed to the flood hazard. Climate change is just one factor. A steady increase of developments on floodplains is adding a whole other dimension to flood risk.
This problem is compounded by the concentration of exposures in high risk areas. Low lying areas by rivers and coastal regions have historically attracted human settlement for a variety of reasons, including access to fertile land and transport. Indeed, many major international cities like London, Tokyo and New York are located next to rivers or within coastal floodplains. Increasing levels of urbanisation and affluence, as well as the tendency to locate high-value assets, such as power stations, next to water mean that the number and value of properties in the floodplain are continually on the rise. This is causing many new challenges for the insurance industry.
To new depths
The risk of flooding to a new development is just one part of the challenge. Construction projects in the floodplain are often accompanied by loss of vegetation and reduction in natural flood storage, thereby potentially increasing the risk of flooding in other areas. It is important for insurers to understand that, irrespective of the potential impact of climate change, the number and value of properties and assets at risk of flooding are set to increase in the future.
An estimated ten percent of all properties in the UK are at risk of flooding, along with 185,000 businesses. The Environment Agency estimates that land, property and assets to the value of £200bn are at risk of flooding in the UK. Further to this the government has set a target of building three million more homes by 2020, and it will not rule out building these on floodplains. Whilst the latest planning legislation with respect to flood risk aims to force new development in low risk areas, many developments still go ahead in areas prone to flooding.
Insurers need to act immediately to reduce the impact of a large flood event on the insurance industry. Further investment is needed to quantify flood risk and continued pressure needs to be put on national and local government to prevent development on floodplains and to increase flood defence spending.
The recent threat of a storm surge in eastern England on 9 November may have sent a shiver down the spine of many insurers, but high water levels were lower than predicted and the defences in place were successful in holding back the majority of the surge. While this can be hailed as a success for the Environment Agency and the emergency planning authorities, it should also be seen as a close call and a sign of things to come if defences are not raised and strengthened.
The design and build of new flood defences can take many years. The Thames Barrier took eight years to construct and any new barrier on a larger scale would likely take a lot longer. Most defences are only built as a reaction to a flood event, but with the technologies available today it is possible to predict where is at risk of flooding before an event occurs. It is therefore important to press the government to invest in defences to protect vulnerable areas long before the damage is done.
Development in floodplains is still taking place despite, in many cases, the objections of the Environment Agency. The insurance industry can help itself and the wider situation by backing the Environment Agency in controversial developments. Insurers also need to take into account the impact of possible climate change when committing to insure these developments.
In addition, the industry may need to recognise that flood risk is very individual to a specific building. Successful mitigation schemes such as temporary flood barriers will often be able to reduce the impact of flooding to a property, and therefore reduce potential losses. Premiums should reflect the risk to an individual property if evidence can be provided. It is possible to offer flood risk assessments that can demonstrate site specific flood risk more accurately, so an initial investment can help both the owner and the insurer to refine premiums.
Whilst fluvial and tidal flood risk is well researched, flooding is increasingly caused by overloading of storm drains, such as that in Hull, England this summer. The only procedure currently available for assessing possible losses to exposures due to surface water flooding is analysis of historical data. Unfortunately historical records are few and far between and become increasingly redundant due to the impact of climate change on storm events.
Modelling surface water flooding can be an extremely complex process, since rainfall events can be extremely localised, strongly determined by topography on the very small scale and also dependent on the capacity of drains. Putting such complex information into a model not only increases the time that the model takes to run, but also enormously increases the data costs involved. If insurers want to be able to define all possible sources of flood risk to a site, they will have to be prepared to pay the cost.
Further development of the technologies already in use is also needed. The current nationwide flood modelling technology in the UK does not often take into account the variation in flood characteristics of different areas. Whilst the adopted approach may be adequate for rural areas, it is extremely important to recognise that urban areas, where the vast majority of exposures are located, are a lot more complex to model.
Congested urban environments produce highly complex patterns of flooding. As such, urban flood models need to operate at an appropriate spatial scale that accounts for the impacts of buildings, natural features and flood defences so that there is an accurate representation of flow routes that flood waters will take.
Flooding, especially in the UK, is likely to be at the forefront of the political and risk management agenda for a long time to come. It is important for insurers to recognise the importance of their role in helping to determine and reduce flood risk.
Dr Justin Butler is managing director of Ambiental Technical Solutions.