With the world dealing with the ongoing effects of global warming and urbanization, this has led to natural catastrophes such as floods to become increasingly more common. However, despite this, studies suggest that only 20% of the world’s $70 billion annual flood losses are insured, which FloodFlash’s Chief Underwriting Officer Dr. Ian Bartholomew suggests leaves a significant protection gap that needs “urgent attention”.
According to Bartholomew, parametric insurance has emerged as a solution to the global flood under-insurance problem, which often offers greater resilience at more affordable premiums.
He states that FloodFlash remains at the “forefront of this evolution of the insurance industry” with its network of high-resolution sensors.
“As capacity challenges continue in the natural catastrophe markets, parametric insurance has already reduced the consequences of disaster. Parametric insurance was once only available to the biggest customers, through cat bonds and other insurance-linked securities, and the very smallest in micro-insurance schemes,” he said.
“Now we are bridging the gap by making it available to a broader market. In the case of natural disasters, parametric insurance can help bridge the protection gap, in reality an affordability gap, helping make large scale parametric structures more viable for corporates one rung below the biggest spender.”
Moreover, Bartholomew addressed that a major concern that is often levelled at parametric insurance is the potential for basis risk, which is the possibility that the payment received potentially does not align with the total cost of the loss, or even in some cases, may not be received at all.
He said: “Putting aside the basis risk accepted in most traditional covers coming from deductibles, average clauses and other policy terms, it’s an understandable concern for this newer form of insurance.
“Parametric products that use tidal or river gauge data, as is commonly done for many parametric products in the market, can come with basis risk. For example, suppose the gauge used for measurement is far from the property being safeguarded. In that case, there is always a risk that the payout will not adequately reflect the expenses associated with flooding.”
Bartholomew also suggests that for parametric insurance to continue growing, a crucial factor that needs to be applied is the selection of an appropriate trigger measurement.
He states that triggers must be a reliable proxy for the costs incurred due to an event, and that it is crucial that measurements are also accurate and precise.
“Trigger measurement must also be cost-effective and provide prompt results in order to address mid-market and corporate needs,” he said.
“I know that an excellent parametric trigger measurement for flood insurance needs to have several key features, with accuracy, reliability and cost-effectiveness among the most important.
“When I started FloodFlash with Adam Rimmer, we had to explore what trigger measurement to use. We discovered what a good trigger looks like, then analyzed the options available before creating a new, better solution.
“FloodFlash needed to combine the ability of a satellite to provide data about flooding at any location with the accuracy and reliability of measurements from the river and tidal gauges. In 2018, we recognized that the emergence of IoT communications technology and low-cost electronic manufacturing made this possible.”
Additionally, FloodFlash previously developed a low-cost IoT sensor which could be attached to the wall of any building or structure. The sensor uses ultrasonic technology which allows it to provide millimeter-accurate water level measurements, with a high sampling rate.
Every five minutes a measurement is taken and processed in real-time to account for environmental factors, which includes air temperature, humidity, and the speed with which flash flooding can occur.
Bartholomew noted that due to its size, ease of installation, and low cost, a FloodFlash sensor can be “installed directly at any locations a customer wishes to insure.”
“The power of the FloodFlash sensor multiplies when used for large and complex risks. The ease of installation means that FloodFlash can create a network of sensors across a country, municipality or area, providing precise, near real-time data across even the most complex of sites,” he said.
“Risk managers now have access to parametric flood coverage that can be designed precisely to the needs of their business. Carving out specific elements of a risk such as business interruption, providing excess limits for catastrophic flooding, layering flood with other natural catastrophe policies or transferring risk within a captive – FloodFlash can be applied in a great variety of ways.”
