Parametric Flood Cover Makes Its Mark

Do we need a new approach to flood insurance?

The answer is yes. The reason for that is the catastrophic flood losses that are currently covered by insurance. The 10-year annualized figure of flood losses was about $50 billion per year in damage due to catastrophic floods, and only about $9 billion of that was covered by insurance. When you have 80% of the catastrophic losses not being covered by insurance, you can’t really say the current insurance market is really doing its job properly.

The really key thing is that it’s not that insurers don’t like risk. What they don’t like is uncertainty. With these low-frequency, high-severity events, it becomes quite difficult to understand exactly what the probabilities are, what the losses might be, and therefore what you should charge.

The great advantage of parametric insurance is that it removes so much uncertainty from the underwriting process. For an underwriter, it is a much more appetizing problem to work out what the chances are of there being six inches of water or so inside rather than working out if six inches of water means I’m paying $2,000 for new carpets or $2 million because you had your new stock in that day. That bit of the equation now goes away.

How does using a parametric trigger change the equation for property owners?

The fact that it removes uncertainty for the underwriter in turn means the price can be reduced for the property owner. They can then get more affordable coverage. You can see the evidence for this in the insurance-linked securities market—which is the world my co-founder Ian [Bartholomew] and I used to work in—and, really, that is where the idea for FloodFlash came from. There you can see, if you have two catastrophe bonds that have a similar modeled expected loss, one of which is parametric and one of which is the traditional indemnity trigger, the insurance premium being paid will effectively be much higher for the same level of risk for the indemnity trigger.

That to us is the proof that this idea of parametric insurance really helps the property owner out by being more affordable. But that is just one part of the series of problems that make it helpful. One of the really important ones is speed. We had a series of big floods in the U.K. in February. The storm happened on a Sunday, and we paid all but one of our claimants on Monday. For those businesses, that speed allowed them to recover and to get their business operating again so much faster than if they were going through a traditional claims process.

You got a lot of press for that.

The experience was a watershed moment both for FloodFlash and for property parametric insurance in general. It was really for us the time when it moved from this cool idea that in theory could work well and speed up the claims process to an end-to-end proven product that had saved businesses and saved livelihoods. We had one customer saying, “The money is already in my bank account, and I’m still trying to work out what the catch might be.” That speed of payment allowed those businesses to survive. It was a payment to the business to keep it going, not a settlement to the business’s liquidators six months later after they had stopped trading.

Who are your customers?

In the long run, everybody who has uncovered catastrophe risk, and that’s actually beyond flood, to earthquake and wind and hail and wildfire.

In the short term, our focus is business owners. That’s largely because there is a scheme called Flood Re in the U.K. that is broadly similar to the NFIP in the States. There is nothing like that for small business owners. They are just left totally exposed if they are in a high flood risk area and they can’t afford or source insurance in the traditional manner.

It’s mainly small businesses, but within that sector of small businesses, it is everything. We have the full range of possible businesses—we have a professional football [soccer] club, we have a UNESCO World Heritage Site, we have manufacturing plants, we have hotels and restaurants, we have power plants. It is as wide a spectrum as you can imagine in type and in size.

Can you tell me about the technology itself?

There are two bits of technology that really underpin FloodFlash, one of which is our underwriting portal that any retail broker can log into to instantly generate a parametric insurance price for any building in the U.K. That is our underwriting department, our software platform.

The other bit of technology is our sensors, which are really our claims department. They are the thing that allows us to monitor flood depths and then make payments at the speed that we do.

The key thing for getting parametric insurance right is to minimize what they call basis risk—the difference in what we pay out for the parametric insurance policies and the losses that the customers actually experience.

We looked at using satellite data. We looked at using drone data. But for all sorts of reasons none of them really fit the purpose in allowing us to capture to millimeter-level accuracy the peak depth of the flood. So we developed our own sensor, which is self-powered and self-connected. That is affixed to the side of the building and effectively uses ultrasound ranging to detect water depth to millimeter accuracy.

What kind of limits are you offering?

It is a real variety. Some people are using it as sort of deductible infill, and others use it as a full flood cover. We do offer a limit of up to £5 million [$6.3 million] settlement at any one location, but in practice it starts at £5,000 [$6,339]. That’s for our standard FloodFlash policy. We are also just rolling out now in soft-launch phase our product called FloodFlash Plus. It’s almost sort of a halfway house in between the off-the-shelf FloodFlash small-business policy and the sort of $200 million catastrophe bonds that we used to work on at RMS in our past life. These are for bigger customers like big industrial plants, power stations, that might have deductibles alone that might be £5 million or £10 million [$12.68 million].

For both the FloodFlash policy and FloodFlash Plus, those limits can be deployed at different levels. People might have 10 grand if water gets to six inches and it starts to ingress the building. They might have another 50 grand when water gets to 18 inches and it starts to hit their stock. They might have another 100 grand when it gets to X and it starts to hit their machinery.

Who provides the coverage?

We are coverholders at Lloyd’s of London, where our policies are underwritten primarily by the Lloyd’s syndicate of Everest Re. We also have one of the three largest reinsurers involved as well.

Any plans outside the U.K. and for new products?

The answer to both of them is absolutely. That $41 billion annual figure of uninsured flood loss, that is a global figure. Flood is actually more front of mind in the U.S., where you have hurricane-driven storm surge as well as inland flooding. There is a huge opportunity in North America and Europe and also in developing economies, like the Thai floods in 2011—something like $45 billion in damages, and something like $35 billion of that was completely uncovered by insurance.

Parametric insurance allows underwriters to access less developed insurance markets faster because of that removal of uncertainty. They don’t need to worry about building codes or something like that, that would be a key source of uncertainty. With parametric insurance, that problem doesn’t exist.

What other products will you consider?

For obvious reasons, the name of the company will not stay as FloodFlash for too long, although we will keep that as a product name. For the same reasons that parametric insurance is starting to work really well for flood, it works well for other catastrophes as well—hail, wildfire, wind. Flood is clearly the biggest front-of-mind peril in Europe. It’s a very different story in the States, where wind, earthquake, wildfire and hail are right up there as well.