Like many of us, I’ve been watching the torrential rain and subsequent floods that have gripped Australia for months with growing concern. Already this year, floods in eastern Australia are expected to cause insured losses of USD 2.84 billion (AUD 3.99 billion), and the situation is still evolving.
But I'm conscious this is not an isolated crisis. Markets from China to India and Malaysia have been hit hard by flooding over the past year. In fact, our recent sigma found that major flooding events accounted for about one-third of the USD 270 billion economic losses caused by natural catastrophes worldwide in 2021, just a quarter of the flood-related losses were covered by insurance. All told, flood affects more people around the world than any other peril.
The APAC region has historically suffered the highest flood-related economic losses globally. But it remains severely under-protected against flood risk, especially in emerging economies. There were more than 20 severe floods in Asia last year, the highest number of any region. Yet over the last decade, only 7% of flood losses in the region were insured, versus 34% in Europe.
This points to a troubling flood protection gap. But it is possible to build resilience against this rising threat. It will require policymakers and insurers to enhance the understanding of flood risk, and to reduce the toll on people and economies through better risk management that incorporates smart planning of land utilization, mitigation, adaptation and risk transfer.
Floods: a rising threat in APAC
Urbanization, economic growth, and changing precipitation patterns due to climate change are all contributing to the increased flood losses. Urban areas don’t absorb water as well as the natural environment, so as cities expand, they become more susceptible to flooding. Wealth accumulates with economic growth, and floods take a heavier economic toll. These factors are especially pronounced in APAC due to the region’s rapid urbanization and development.
Fast-growing cities are often located on coastlines or near rivers that are increasingly prone to flooding. On top of that, development of flood infrastructures, such as sea walls, dams and levees, often lags the expansion of cities and is not keeping pace with the climate trend - as evidenced by recent floods in Australia. Much of Asia is also vulnerable to tropical cyclones, which can generate severe floods from both storm surges and as inland flooding following heavy rainfall. Swiss Re estimates that over the past 20 years, factoring in losses resulting from tropical cyclone-induced floods would add another 30% to global insured flood losses.
All these factors combine to dramatically increase the loss potential from floods in APAC and demonstrate the urgent need for protective strategies.
Reckoning with flood risk
For insurers, monitoring flood risk presents multiple challenges. The public and industry focus is typically on large-scale, ‘primary perils’ such as tropical cyclones and earthquakes. Small and mid-sized events, including smaller storms producing hail and flooding, are considered ‘secondary perils,’ and the related losses often underreported, meaning they may not be accurately reflected in future modelling.
Flood is also a complex peril to model. The influence and interplay of various factors such as ‘soil sealing,’ ageing infrastructure, and climate change create additional challenges compared to other natural catastrophes.
Yet improving risk modelling is what we must do if the insurance industry is to expand protection and offer sustainable flood protection to communities. Current models rely heavily on historical events and loss data. But these are inadequate in the face of rapid urban and economic development in our region, and the growing threat of natural catastrophes due to climate change. Continued reliance on historical data will see the industry fall behind conditions on the ground, leading to unexpected losses and further widening of the protection gap.
A path to close the flood protection gap
Despite these difficulties, we firmly believe flood risk is and will remain insurable. The first step for re/insurers is to increase our understanding and awareness of this underestimated risk. I’ve been pleased to see the significant progress made in this respect, such as the evolution of sophisticated flood risk maps and the development of fully probabilistic catastrophe models. For example, the figure below compares the actual footprint of the flood in Kerala in October 2021 captured by remote sensing, with the Swiss Re Global Flood Zones for fluvial and pluvial risk. 82% of the entire flood footprint is captured in the Flood Zones, displaying their capabilities for risk selection and land-use decisions.
Figure 1: Remote-sensed flood footprint (left), compared to Swiss Re Global Flood Zones (right), fluvial and pluvial, over a region affected by the October 2021 flooding in Kerala, India.
Source: ICEYE, Swiss Re CatNet®
That said, industry modelling capabilities for flood risk are still less rigorous than for primary perils, and more work needs to be done. To build resilience in a wetter world, we need to redouble our efforts to bolster flood-specific data and modelling. This means:
Affording floods the same attention as primary perils,
Improving data quality and granularity by capturing and sharing flood-specific exposure, and
Advancing modelling capabilities while keeping abreast of fast-developing temperature and land-use changes, urbanization, and other social and macroeconomic trends
Boosting insurance penetration is also key to closing the flood protection gap. While traditional indemnity flood cover can certainly serve this purpose, parametric or index-based solutions are becoming increasingly popular for their efficiency and versatility.
To give just one example, in 2020, Swiss Re partnered with India's northeastern state of Nagaland to provide parametric coverage for the monsoon season. The transaction covers the entire state of Nagaland through six distinct zones, with a stepped payout feature to ensure funds are allocated where losses occur and in proportion to the amount of rainfall recorded. By protecting the state treasury’s balance sheet, the solution enables Nagaland to build fiscal resilience against natural disasters.
Re/insurers can further contribute to flood resilience by making long-term investments in sustainable infrastructure and mitigation strategies. ‘Grey infrastructure’ such as dams and levees have been the traditional approach to mitigate flood risk, while ‘Green infrastructure,’ such as reef and mangrove restoration can alleviate flood risk by allowing excess water to soak into the ground and create much less damage. Fostering the development of this infrastructure can enable communities to stand stronger in the face of disasters and climate change.
Flood risk can be managed, but it requires concerted action by all of us. If government, the insurance industry and our societies commit collectively to addressing flood risk through mitigation, smart planning and proactive steps to reduce financial exposure, we can succeed in making Asia, the region we call home, better prepared and positioned for prosperity.
Source: swissre.com
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