Parametric Flood – Part 1 – What we need to address!
As an insurance company focused on Flood education, we are here to bring new perspectives about Parametric Flood.
First of all, Parametric Flood risk is a significant and growing problem worldwide, with constant building up of commercial and residential areas due to economic development, and population growth that come with it, these factors are exacerbating the impact of floods on communities and infrastructure. From all around Florida, flood protection remains insufficient, despite the increased protection and claims during hurricane season. With unfulfilling insurance coverage, it’s an underinvestment in flood resilience, and “interesting” policy decisions.
The Marsh McLennan Flood Risk Index reveals that 18% of the global population is currently threatened by flooding, and this number is expected to rise significantly in the coming years. While this could be alarming to some, we may not be as fazed in Florida. Our state is prone to flooding.
Economic losses due to floods are staggering, with only a small proportion (12% worldwide since 1980) being insured. From 1992 to 2006, global economic losses from floods amounted to $504 billion (adjusted for inflation) which increased to $729 billion between 2007 and 2021. The gap between economic losses and insured losses highlights the lack of sufficient flood risk protection, both in terms of insurance coverage and resilience measures.
Closing the flood protection gap requires a multi-faceted approach. One way to bridge the divide is by increasing participation in flood insurance. Studies show that individuals and communities with flood insurance recover better and faster from disasters. However, low coverage rates can be attributed to affordability constraints, limited risk awareness, and poor understanding of insurance and behavioral biases in decision making.
Parametric insurance and community-based catastrophe insurance (CBCI) are emerging as innovative approaches to improve climate resilience and bridge the flood protection gap. Parametric insurance utilizes predefined triggers and measurable indices for faster and more efficient financial assistance after disasters. CBCI arranges disaster insurance at the community level, providing affordable coverage and incentivizing risk reduction. A CBCI pilot program in New York City utilizes parametric insurance with satellite data and real-time sensors to trigger grants for low- and moderate-income households affected by floods. Many more programs could be modeled from this one.
A comprehensive disaster resilience strategy should combine insurance and risk transfer solutions with risk reduction measures such as hazard mitigation and community planning. Addressing disincentives in existing statutes and regulations can enhance the success of CBCI and other private risk transfer programs. Collaboration between the insurance industry, government, and other sectors can encourage further flood resilience investments.
Three ways to manage flood risk are suggested:
- Learning to live with floods through small-scale risk mitigation. Florida provides excellent flood strategies as many communities are affected by flooding.
- Building strategic protection with large-scale interventions. With better, more stable building codes and materials used, as well as pre-planned flood mitigation practices implemented in construction; the flood risks stats can become lower.
- Preparing for relocation from high-risk areas.
Closing the flood protection gap requires decisive action, effective leadership, and critical enablers in governance, risk culture, land use, infrastructure planning, finance, and insurance. By taking a systemic approach and working together, societies can effectively respond to rising flood risk and minimize its impacts on individuals and communities.
Stay tuned for part 2 to understand how parametric insurance works and how we can help you mitigate much of the flood risks associated!
LEGAL DISCLAIMER
Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.
