Insurers and reinsurers are ready to meet growing public desire for improved flood coverage as the risk of flooding to communities continues to rise across the globe, according to Swiss Re’s Santiago Noriega and Alexa Wiese.
“On average, flooding affects more people worldwide than any other type of natural catastrophe because flooding can occur practically anywhere,” said Santiago Noriega, Swiss Re Senior Property Solutions Specialist.
Noriega, alongside Swiss Re Behavioral Solutions Specialist, Alexa Wiese recently spoke with Reinsurance News about the expanding flood protection gap (disparity between economic and re/insured losses post-event).
“Records indicate that extreme weather events, such as torrential rainfall and severe storms, are increasing in number and intensity as our climate continues to change. Coastal communities can be some of the worst hit but are not the only ones who may suffer.
“The main reasons behind this trend are (a) global warming and changing weather patterns, (b) increased development in coastal areas and (c) lack of development of insurance market for the specific peril. The take up rate remains too low for an advanced economy like the US.
“But we’re working to change that and are starting to see some good traction, albeit there is still a long way to go,” continued Noriega.
It’s often the case that in order to improve insurance penetration rates in both mature and emerging markets for the majority, if not all perils, public and private sector collaboration is vital.
Noriega explained that in order to achieve good results the public and private sectors will have to work together, stressing that leveraging the resources of one side will be insufficient to meet the demands of the task at hand.
“There is more to the issue than just providing capacity. We need to get people to realize the true risk of flooding. We need to invest in educating the public. We need to discuss with banks, insurance agents, insurance companies, property owners, banking and insurance regulators in order to raise awareness and ease the process of getting a flood policy.
“Closing the flood protection gap specifically in the US will take a concerted effort from many different parties. Swiss Re is committed to both the NFIP and the private insurance industry. We believe collaboration is the way to solve the flood challenge,” he continued.
Raising awareness and increasing education around flooding and flood insurance is one potential way of increasing penetration rates, but it’s important that insurers and reinsurers go beyond the more traditional ways to sell their policies to remain relevant in a constantly evolving risk landscape.
Expanding on this, Wiese said: “This usually looks like sending additional information, highlighting the features of the product, or giving discounts. However, we have to recognize that people aren’t always rational and can be swayed by things like their emotions, environment, and context.
“So at Swiss Re one of the things we’re doing is to use behavioral economics to better understand what influences and drives behavior around buying flood insurance. We’re approaching this from a couple of angles. The first is agent education and how to encourage agents to sell a new product like flood while the second is around consumer messaging and how they view and understand their own flood risk.
“There is a lot of research we can already leverage from academic setting, but as we run more trials ourselves we can put steps in place to try and increase the penetration rates around flood insurance.”
As expected, large events like hurricane Harvey and hurricane Florence naturally result in an increase in awareness around flooding to the general public. However, any post-event uptick is often short lived.
“Insurance companies have also noted the issue and many have started to think about the potential business opportunity in conjunction with an increased social and community involvement.
“However, the losses themselves would not change the market dynamics. In our opinion a much bigger driver for increased penetration will be a better customer experience (ie ease of use and accessibility) and expanded coverage at an affordable and adequate price point,” said Noriega.
Wiese, added: “From a behavioral economics point of view there have been studies conducted that show flood losses do increase the take up of flood insurance, but that impact only lasts for a limited period of time, typically around nine years. In other words, people have short memories and the uptick doesn’t last.
“The challenge is to ensure we don’t see that drop off over time and we believe education and highlighting the purpose of insurance are two key factors to that.”
The pair explained that over the last five years, more and more flood events have occurred, ultimately growing the gap between economic and insured losses as the latter continues to rise.
“This is actually the case across a number of perils and not just flood. After a couple of benign years in 2014 and 2015 the loss activity increased significantly in 2016 and 2017 and 2018 remained above average levels,” said Noriega.
Despite the challenges, the private market is starting to have a meaningful influence. Personal Lines flood coverage was considered largely uninsurable a few years ago, but Noriega underlined how advancements in technology, alongside regulatory and legislative change, has helped insurers and reinsurers better understand, and therefore better quantify and more adequately and accurately price flood risk.
“More granular maps have given us a much better understanding of the risk exposure and this enhanced data, and increased computing power means we can model events and quantify losses in a matter of seconds. Additionally, with the low interest rate in the financial market, insurance companies are eager to grow the size of the pie and explore new areas for growth. Flood has been identified as an underserved sector and many companies have started investing. Using Florida as an example, the number of insurers eligible to write private flood insurance in the state has increased 45% over the past two years, according to Florida’s Office of Insurance Regulation.
“Consumer are also more aware of the issue. There is seldom a month there is no flood event in the news. Just mentioning names like Irene, Sandy, Harvey, Florence or Michael remind us of the potential hazards waiting around the corner.
“Legislation and regulatory changes are helping the private market develop and make progress towards closing the protection gap while opening up new revenue streams for insurers,” he said.
Adding: “The public desire for improved flood coverage is finally being met with a true blueprint for a private market solution. With government relief budgets already stretched, recovery funding will need to come from somewhere else moving forward.
“The private insurance industry is ready to step up to fulfil its potential as a source of financial support. When the private market takes more of the risk it eases the burden on local, state and federal government budgets that are already stretched. The collaboration between all the different players in the flood insurance sector will make our society more resilient.”