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Flood an underestimated risk

Inspect, inform, insure

Floods affect more people worldwide

than any other type of natural disaster.
But the risk from flooding is often
underestimated. In developing countries,
flood insurance is not widely available
or affordable. And even in high-income
countries, where flood insurance is
increasingly offered and bought, the
conditions that make flood insurable are
not always given. This is because flood
risk presents a set of special challenges.
But these challenges can be overcome
and there is no reason why homeowners
and companies should not be able to
cover their risks.

Table of contents

An introduction to flood risk

Insurance principles and challenges


Flood insurance solutions

a) Types of flood insurance solutions
b) Implications for improved flood insurance
b) Non-traditional insurance solutions




Everyone who lives close to a river generally knows of the risk from flooding. However,
flood risk is not obvious everywhere. Every year we witness floods in areas where hardly anyone was expecting them. In fact, no other natural disaster affects more people
than flood. Most households and buildings could be affected by intruding water as a
result of local flooding.
In 1998 Swiss Re published Floods An insurable risk?. The report concluded that
flood was an insurable risk if the principles of insurability were met. Since then, flood
insurance has become widely available in many developed countries. However, key
insurance principles were not followed in all cases, and large losses have called into
question the economic viability of flood insurance. In contrast, in most developing
countries flood insurance is neither available nor affordable.
Indeed, it is more difficult to insure floods than many other hazards, not least because
many people are not aware of their risk exposure. However, thanks to recent improvements in the modelling of flood risks our own Global Flood Zone model being an
example of that and the fact that the actual risk community is sufficiently big, we can
overcome all obstacles in flood insurance.
With this publication we want to raise greater awareness of floods, their risks and the
role of insurance in addressing them. We show what it takes to tackle the challenges
in flood insurance and how successful solutions might look for homeowners and companies. To further illustrate the complexity of the issues involved and present these
in a new and interactive way, we have produced an accompanying App on flood risk,
available for download through the Swiss Re website.
This publication is more than a simple revision of the 1998 edition. While reiterating
key insights already known to the industry some 14 years ago, the research presented
herein builds on the wealth of experience we have gathered since then. No doubt, it
has benefited greatly from improved risk models and state of the art geo-information
technologies. Combined with the collective determination by insurers, governments
and policyholders to better manage flood risk, our newest assessments and findings
contribute towards making flood insurance a viable and affordable option to many more
communities around the world.

Matthias Weber
Group Chief Underwriting Officer

Swiss Re Flood an underestimated risk 5

An introduction to flood risk

The rain is pouring down hard. The noise is incredible. That does
not bother you too much because you think you are safe. But the
next thing you notice is that your ground floor is submerged in murky
flood water. Once the water has subsided and the actual damage
becomes visible, you face a second shock: the realisation that all
your possessions, now worthless, were not insured.




The economic cost of natural catastrophes

has clearly risen. This is true for all weatherrelated natural catastrophes, including
flood. The increase is mainly due to economic development and population
growth, a higher concentration of assets
in exposed areas, greater vulnerability
of insured objects and climate change.
For example, for the first time in human
history more people live in urban centres
than in rural areas. Many of these cities
are located on the coast or adjacent
to rivers and are threatened by floods and
storms. Climate change is likely to increase the risks. In its Special Report on
Managing the Risks of Extreme Events
and Disasters to Advance Climate Change
Adaptation, the IPCC suggests that
scientists are far more confident about
the effects
of climate
2010on rainfall
intensities than many other natural disasters, including hurricanes and tornadoes.
This makes the need for
adaptation even
more pressing, forcing countries and
local communities to rethink
60000how they cope
with more extreme weather (see case
study Flood risk and climate
on page 20).

Scenarios like this one happen far too

often. But even though floods are a
common occurrence, flood insurance for
homeowners is often not available or
affordable, especially in developing countries. This is even more striking because
floods affect more people worldwide
than any other type of natural disaster. In
the future, the severity and frequency
of flood catastrophes are expected to increase further. This means that more
people will be affected, and the cost of
disaster relief and reconstruction will
continue to go up.


Insured natural and man-made catastrophe losses, 19702011

in USD billion, at 2011 prices



r-related catastrophes









Man-made disasters

1992: Hurricane Andrew

1994: Northridge EQ
1999: Winter storm Lothar
2001: Attack on WTC
2004: Hurricanes Ivan, Charley, Frances














Weather-related catastrophes

2005: Hurricanes Katrina, Rita, Wilma

2008: Hurricanes Ike, Gustav
2010: EQs Chile, New Zealand
2011: EQs Japan, New Zealand, FL Thailand

Insured losses from weather-related natural catastrophes, including floods and storms, have
risen sharply over the last twenty years. But most of the total damage is uninsured. In 2011,
USD 113 billion in insured losses was just under one-third of the total USD 366 billion in economic
losses from catastrophic events.

6 Swiss Re Flood an underestimated risk


In all cases, the risk from
flood events is
underestimated. Many residents are not
0 can 1970
aware that substantial losses
occur, 1975
even in geographic locations that have no
river in the vicinity. In 2011, for example,
a heavy cloudburst over Copenhagen
dumped about 160 millimetres of rain on
the Danish capital in less than 24 hours.
This is more rain than the city usually gets
in two months. The floodwaters damaged
houses and disrupted traffic. While in the
case of Copenhagen losses were largely
covered by insurance, rare but powerful
events such as this one demonstrate that
high losses outside known river flood risk
zones are possible. Recent years have
given us a glimpse of what large-scale
flood scenarios could look like in the future.

1992: Hurricane Andrew

1994: Northridge EQ
1999: Winter storm Lothar
2001: Attack on WTC
2004: Hurricanes Ivan, Charley, Frances



2005: Hurricanes Katri

2008: Hurricanes Ike, G
2010: EQs Chile, New
2011: EQs Japan, New

Top ten insured fresh water floods in history

Insured loss,
Insured loss,

USDm, at 2011
as a % of

countrys property


JulyNov 2011
Aug 2002

Jun 2007
Aug 2005
Jan 2011
JulAug 1997

Jul 2007
Dec 2010
Apr 1993
JunAug 1993

Czech Republic
United Kingdom
Czech Republic
United Kingdom
United States
United States

Insured loss,
Insured loss,
Total losses
as a % of
as % of GDP
as of GDP
countrys non-life
premiums from
the prior year
















Notes: Premiums for 2011 are estimated. Australias premiums are for 12 months ending in June
Thailands property premiums are calculated including the premium volume of industrial all-risk policies
Sources: Swiss Re Economic Research databases, Oxford economics

When reviewing the biggest flood events

of the last 20 years, Thailand stands out.
In 2011, an early onset of monsoon rainfalls coupled with a large number of
tropical depressions brought the highest
rainfall rates to Thailand in over 50 years,
causing major flooding across the central
plains. The inundated area was about the
size of Switzerland. But it was not only the
sheer scale of the flooded area that made
this a catastrophe of extraordinary proportions. It was also the surprisingly huge
asset values that were destroyed in the
flooded area and the poor protection
measurements in place. Another example
of an especially destructive catastrophe
is the 2002 flood that struck Germany, the
Czech Republic and other regions in
Central Europe, threatening hundreds of
lives and thousands of livelihoods. Even
though the insured losses were the second-largest in the last forty years, only
a comparatively small part of the damage
in Germany was insured.

There is clearly no lack of demand for flood

insurance. But unlike the example of fire
insurance, which is widespread, flood insurance is still not very common. The
insurance penetration rate for industrial
property is usually higher than that for
residential property. The latter varies
greatly depending on the country but on
average is less than 10%. What are the
reasons for such a low penetration rate?
One explanation is the fact that many
residents and businesses underestimate
their exposure to flood risk. Another,
however, is that flood insurance involves
a set of very specific challenges which
restrict the commercial viability of flood
insurance. But these challenges can be
overcome, and from an underwriting perspective there is no reason why comprehensive cover for flood damage for homeowners should not be available as long
as the essential principles of insurability
are met.

Swiss Re Flood an underestimated risk 7

An introduction to flood risk

Types of flood

Download our app at www.swissre.com/floodriskapp.

Floods come in more varied forms than any

other natural disaster. For the insurance industry, differentiating between types of flood is an
important consideration, since different events
can produce very different loss patterns. If an
insurance policy covers losses from one type
of risk only, loss adjustment becomes considerably more difficult, as each loss must be allocated to its respective cause.

The most frequent types of flood include the

Flash flood: Short, violent rainfall over a
small area cause the level of smaller
watercourses to rise considerably. Sudden
floods, erosion and rubble deposits are the
result. In built-up areas, the sewer system
is often overburdened, resulting in damage
from water backing up.
Dam burst: Extremes of precipitation,
landslides into reservoirs, design defects or
subsidence are the main reasons for the
failure of an earth or concrete dam. Most
disasters occur during the construction
phase or shortly after completion.
River flood: As the result of days or weeks
of continuous rain and sometimes in combination with snow melt, rivers can overflow
their banks. This can leave thousands of

8 Swiss Re Flood an underestimated risk

square kilometers of land under water for

weeks across the river plains.
Storm surge: Storm-force onshore winds
pile-up the water against a coast over
hours. Particularly at high tide, vast quantities of water are amassed along the coastline, and this can flood large areas of land.
The situation may be aggravated even
further by high waves.
Tsunami: Seaquakes, volcanic eruptions
or gigantic landslides on the seabed trigger
low waves which move outwards in deep
water at speeds of hundreds of kilometers
per hour, and hurtle onto the shore in the
form of enormous breakers. Tsunamis after
heavy seaquakes caused enormous
damage in Thailand in 2004 and in Japan
in 2011.
Torrential rainfall: Short-lasting and local
but intensive precipitation. In many cases
in 24 hours the same amount of rainfall of
one or two months is reached. Torrential
rainfall triggers flash floods in hilly areas. In
flat areas local accumulation of water leads
to inundation.
Ice jam: When river ice breaks up in the
spring, floes can get caught on bridges or
other obstacles. This greatly reduces the
cross section of the watercourse, damming

the water upstream and causing it to overflow the banks. If the barrier breaks suddenly, damage can also result downstream.
Mudflow: Loose soil on a slope can become
so heavily saturated by intensive precipitation that a spontaneous slide results. The
wave of water and solids hurtles downhill
along gullies and the beds of watercourse,
and is extremely destructive.
Lahar: When a volcano erupts large
amounts of ash, the next heavy rainfall
transports this ash downhill as a mudflow.
A similar process occurs when the icecap
of a volcano is melted by lava.
Groundwater: If the groundwater level is
only a few metres below the surface, precipitation and infiltration from neighbouring
watercourses swollen by flood can cause
the water level to rise to the point where
basements are damaged by seepage, or indeed entire buildings are destabilised and

Flood hot spots

In 2011, historic rainfall and consequent flooding in Thailand led to the loss of hundreds of
lives and left countless people homeless. The
size of insured loss caused by such extensive
flooding came as a surprise to the international
insurance industry. At USD 12 billion, it is an
extraordinarily high insured loss in the global
history of fresh water flood events. The Thailand event painfully demonstrated that insured
losses from floods can be as high as those from
earthquakes or tropical cyclones. Since flooding can occur in any country, the industry may
be faced with much greater hidden loss potential than it realises.

In response to recent events, Swiss Re undertook a global study to identify other emerging
markets comparable to Thailand which face
high flood risk and benefit from strong economic growth. The aim was to identify hidden
hot spots with latent large flood loss potential.
In the study, emerging markets were ranked
based on a combination of factors, such as real
GDP growth, the ratio of foreign direct investment to national GDP, and flood risk indices by
country. The study revealed that other countries in the world present an even greater flood
loss potential than Thailand. China tops the
ranking, followed by the remaining BRIC countries Brazil, Russia and India.

Emerging markets flood hot spot rankings

Top 20
Top 30
lower ranks
not considered

Source: Swiss Re Cat Perils, GfK GeoMarketing Map Edition World

Swiss Re Flood an underestimated risk 9

River flooding in Sheffield in June 2007. The city suffered extensive damage as the River Don overtopped its banks causing widespread
flooding in the Don Valley area. The Sheffield floods were one of a series of destructive floods that hit the United Kingdom during the
summer of 2007.

10 Swiss Re Flood an underestimated risk

Insurance principles and challenges

Floods are more difficult to insure than other natural disasters.
One reason is that no other natural hazard comes in as many varied
forms as flood. This makes risk assessment particularly difficult.
In addition, no other peril defies the basic principles of insurability to
the same degree.
The most significant obstacle to making
flood insurance commercially viable is the
challenge of building a sufficiently large
risk community that comprises more policyholders than only those living in the
highest exposed areas.
The fundamental problem is adverse
selection, the tendency of those living in
areas exposed to a high level of flood
risk to seek more insurance coverage than
those exposed to lower flood risk. This
may not be surprising. But since insurance
only works when risk is shared among a
critical mass of policyholders, insurers are
faced with a dilemma. They either have
to charge premiums that would be unaffordable to most policyholders or, as
often the case, decide not to insure flood
risk at all.

Principles of insurability
Mutuality: A large number of people who are at risk must combine to form
a risk community
Assessibility: The expected loss burden must be assessable.
Randomness: The time at which the insured event occurs must not be predictable,
and the occurrence itself must be independent of the will of the insured.
Economic viability: The community organized by the insured people must be
able to cover its future, loss-related financial needs on a planned basis.
Similarity of threat: The insured community must be exposed to the same
threat, and the occurrence of the anticipated event must rise to the need for
funds in the same way for all concerned.

Nevertheless, from an underwriting

perspective there is no reason why comprehensive cover for flood damage
should not be available and further opti-

mised under certain conditions. Policyholders, governments and insurers all

have to contribute to making flood insurance more effective and economically
attractive. Most importantly, to succeed in
forming an efficient risk community they
must uphold the five basic principles of insurability: mutuality, assessibility, randomness, economic viability and similarity
of threat.
Mutuality requirements are met when
those members of a community frequently affected by a risk are not the only ones
insured. Since the proportion of buildings
that are seriously and frequently threatened by flooding is generally around 5%
of a countrys real-estate stock, any such
risk community would be too small to
offer an economically sensible solution for
both insurers and insureds.
The second insurance principle relates to
the assessibility of flood damage. What
is the expected severity and frequency of
flood events? What is the total value of
insured assets in an exposed area? What
are the key insurance terms and conditions? Thanks to state of the art flood models, field inspections and underwriting
knowledge, floods are now more readily
assessible than ever before. However,
as with all natural hazards, statistics are
not entirely reliable when it comes to
major, catastrophic flood losses. Since
the probability of their occurrence is low,
statistics often fail to take them into account at the right level. However, catastrophe scenario-planning backed by modern climate research and the latest techniques of geo-information science can
yield useful results for risk assessments.

Swiss Re Flood an underestimated risk 11

Insurance principles and challenges

Swiss Re Global Flood Zones

Flooding has traditionally been seen as un

insurable because flood risk assessments
were often poor and the information needed
to estimate individual, risk-adequate premiums
was lacking.
Indeed, flood risk modelling is a very complex
matter since it requires extremely detailed
information on topography and climate factors.
There is much uncertainty about the frequency
of flooding, as weather patterns are changing
due to climate change. Topographic models
are available but they come at a high cost, and
model development is very expensive. There
are a few examples of probabilistic risk assessment models available from risk consultants,
but they mainly cover developed countries like
the UK or Germany. Some storm surge models
are available for the US, also some torrential
rainfall models for tropical cyclones.
Technological advancements over the last ten
to fifteen years have tremendously helped to
improve flood risk modelling. The availability of
digital elevation models, modelling capabilities and computing power have all improved.
Google Earth and satellite data have made
a huge difference to underwriting large indus-

trial risks, providing ready answers to questions such as: How far away is the coast or the
river? How big is the river? What is the elevation difference to the next body of water?
Modern satellite data also help to determine
the exact coordinates of a risk by scanning
the horizontal and vertical measurements of a
building or outside storage facilities. Every
time a huge flood occurs, the flood footprint
captured by satellite data helps calibrate the
models further.
Even though just about everything in flood
modelling has improved over the last few years,
the information available is still patchy and
inconsistent. Swiss Res Global Flood Zones
close this information gap. The Global Flood
Zones depict flood exposures at a very granular level for locations in almost every part of
the world.
In combination with CatNet Swiss Res
Hazard Atlas the Global Flood Zones are a
powerful tool to develop flood solutions, provide selective underwriting and accurate pricing, analyse the flood exposure of entire
portfolios and identify flood hot spots worldwide (see page 9).

Example flood risk exposure for Paris, France

Swiss Res Global Flood Zones provide detailed flood hazard information and can be accessed through Swiss Res CatNet portal.

12 Swiss Re Flood an underestimated risk

Better risk assessments at least partially

impair the principle of randomness because they deliver information that makes
the probability of an insured flood event
more predictable. They also increase the
risk of adverse selection. For example,
by using a flood hazard map people can
easily find out if their assets are at risk
and decide whether their property will be
affected more or less often. Others have
been affected by a flood event in the past
and may now be looking for insurance
coverage. Whatever the case, the randomness of when the next event happens
persists, at least if we look at locations
in flood zones with high return periods.
Economic viability is given if collected
premiums are sufficient to pay for future
losses, including the cost for capital
and distribution, and if the shortfall can
be limited to the risk appetite of the individual insurance players. Risk-adequate
premiums can be calculated based on
risk maps and loss experience. By way of
newly developed flood risk assessment

Five basic principles must be met to make flood

insurance an effective and viable option. Governments,
insurers and homeowners all have something to
contribute towards the development of a functioning
flood insurance system.

models the accuracy of location-dependent premiums could substantially be

improved. In addition, the assessment of
large loss scenarios is nowadays more
precise than two decades ago when no
probabilistic flood risk assessment models were available. However, a once-in-acentury loss occurrence may overburden
local risk-carriers financially. An international risk community, supported by the
global reinsurance industry, provides the
most effective remedy in such instances.
A similarity of threat, the notion that an
insured community must be exposed to
the same threat, only applies to floods
in a limited way. This is because the term
flooding comprises various types of
occurrence, such as a storm surge, flash
flood or dike failure. But the common
denominator is water, and all these events
generally give rise to serious damage to
insured property.
To be sure, the principles of insurability
are not clear-cut. Each risk is reflected on
a continuous scale, and only few risks
fulfil all the criteria. Moreover, the insurability of risk changes over time. This is
particularly true of disaster risks. In the
case of flood, more sophisticated modelling techniques have made flood risk
much more assessible but at the same
time have tempered the randomness
of flood occurrences. In addition, mutuality criteria can shift, as flood risk is often
underrated. Experience in recent years
has shown that supposedly safe areas far
away from rivers and flood zones can still
be inundated. This can occur as a result of
extreme rainfall, because more and more
surface areas are built on and therefore
no longer available for natural drainage,
or because existing drainage systems
are overloaded. In general, risks such as
floods are often difficult to insure without
innovative solutions or state intervention
because the insured cannot afford the
premium. Circumspect underwriting policies and suitable protective measures
support the principle of randomness.

Swiss Re Flood an underestimated risk 13

Insurance principles and challenges

Living room of a house in New Orleans after Hurricane Katrina caused extensive flooding in the region in August 2005. Furniture has
been tossed about and is covered with fallen sheetrock and insulation. The flood waters almost reached the ceiling, as the high water
marks along the wall show.

14 Swiss Re Flood an underestimated risk

Flood insurance solutions

A broad risk community is at the heart of any functioning
insurance system. Once a risk community has reached the scale
needed to share the potential loss burden across a sufficiently
large population, premium rates for flood insurance work out to
be considerably more reasonable.
Of the five insurance principles discussed
previously, mutuality and economic viability present the most serious obstacles
to a functioning flood insurance system.
Financially speaking, an owner of a building located in a 20-year flood zone, which
in the event of flooding would suffer a
20% loss, would have to pay an unaffordable annual premium of more than 1% of
the total insured value. For example, for a
house that is valued at USD 200000 the
insured would have to pay an annual premium of over USD 2000. This is a premium rate that is not economically sensible.
But certain strategies have helped to
widen the boundaries of insurability. Apart
from protection measures, these include
underwriting tools such as risk selection,
exclusion, limits, self-retention schemes,
bundling of products as well as new
forms of risk transfer, the creation of pools
and innovative public-private partnerships. So what can these strategies do to
help meet the criteria of insurability?

hensive option which is in place in numerous countries. And as long as the risk
community generates an adequate premium volume, sufficient capacity should
be available to cover losses from extreme
flooding and secure the economic viability
of a region exposed to flood risk.
Once a risk community has reached the
scale needed to share the loss burden
across a sufficiently large population, insurance premiums work out to be considerably more reasonable, with prices becoming affordable for both low and highly
exposed risks. The illustration below
shows this in a simplified form for river
flood risk. The average premium for a
broad-based risk community can be 20
times lower compared to a solidarity
community that is restricted to risks in the
most exposed zone. Additional differentiation of premiums by exposure and the
introduction of policyholder deductibles
in a broad-based risk collective would
enable most of the population to participate at reasonable premium rates.

Most importantly, it is necessary to build

a broad-based risk community, either
with or without legislative intervention. A
large community can be built in two
ways: either by offering a comprehensive
natural perils package or by making flood
insurance mandatory. This may mean
merging a high-risk flood community with
lesser exposed groups as well as with
communities facing other types of perils,
such as hail, wind or earthquakes in an
effort to diversify the risk. Combining natural perils with fire coverage increases
the size of the risk community and therefore often the package more affordable.

To limit a potential cross-subsidy from

low-risk areas to high-risk areas, protection measures must be taken either by
the state, for example building dykes or
levees. But mitigation measures by individuals are equally important, which may
include moving goods to higher ground,
sandbagging and similar measures. Insurance conditions could furthermore be
adapted to the individual risk, for example
by introducing a deductible or other
means of loss participation in a high frequency flood zone can be substantially
higher than in less exposed areas.

To satisfy the principle of randomness and

mutuality, the most effective option may
be to refuse cover for flood risks with a high
expected loss and a loss return period of
less than 25 years in favour of other, economically more expedient solutions, such
as flood protection measures. Last but not
least, making insurance compulsory for
fire and allied perils is the most compre-

While a limited cross-subsidy is generally

part of a mandatory insurance solution,
strictly risk-adequate premiums are essential for an optional scheme. But in any
case, locations that are more often affected than once in 25 years are insurable
only at a very high cost. Flood insurance
could still be issued for such locations
but only at a cost that, in most cases, would

Swiss Re Flood an underestimated risk 15

Flood insurance solutions

no longer be economically reasonable

for the insured. Instead, risk prevention
and mitigation would be the preferable
and cheaper solution for them.

Types of flood insurance solutions

The possibilities of introducing flood insurance are as varied as the circumstances faced by different risk communities.
This means there is no ideal or universally
applicable solution for insurance against
floods. Country surveys have shown that
widely different approaches can in fact
work: in some countries, comprehensive,
compulsory flood cover has been provided centrally for many years; in others,
flood insurance is offered as an option;
and yet in other cases, it is bundled
with cover against other natural perils.
Since virtually everyone is exposed to
some degree to one or more natural hazards, a compulsory insurance scheme
can have many advantages. Spain, France
and Switzerland all have examples of
compulsory insurance against natural

perils. In other countries, such as Israel,

borrowers are required by their bank to
take out adequate insurance cover as a
security for mortgages. This also helps to
expand the risk collective. The system in
the UK manages without legislative and
regulatory effort, which can make it easier to implement. In this system, flood
covers are automatically included for an
adequate premium in fire policies under
the terms of a voluntary agreement between the insurance industry and the
government. In yet other countries, insurance companies offer coverage to businesses but have chosen not to provide
flood insurance to residential property
owners. As a result, homeowners are left
to rely on government-provided financial
aid programs after a flood event.
Whether flood insurance is mandated by
law or not, national insurance models
generally fall into one of four categories:
public and optional (eg, United States);
public and bundled (eg, France); private
and optional (eg, Germany); and private
and bundled (eg, United Kingdom). In
each case, insurance is provided either by

Risk-adequate premiums as a function of the risk communitys size

This figure shows the development of the risk premium when the property insured is successively less exposed. If all property were insured at
the same price, the premium would be 0.2 . However, if insurance were limited to property in the 100 to 500-year risk zone, the premium would
be ten times as high, ie 2.2 . This example demonstrates that compulsory insurance at a standard premium rate requires considerable solidarity
from those insured parties who are less seriously at risk. This situation could be partially mitigated by a slight graduation of the premium in line with
the actual risk.

16 Swiss Re Flood an underestimated risk

private insurance companies or public

sector agencies. Approaches differ in their
delivery of insurance. In the optional
system, flood insurance is separate from
other policies, and insurers offer it upon
payment of an additional premium. By
comparison, in the bundled system flood
insurance is made available as part of a
package where flood is included along
with other perils, such as wind, fire and
theft. But it is not offered as a separate
policy option and therefore not elective.
United States (public and optional)
The National Flood Insurance Program
(NFIP), a cooperative arrangement between the insurance industry and the US
federal government, is an example of a
public and optional flood insurance system.
Under the terms of the program, public
officials determine prices and coverage
based on pre-defined flood zones and
flood risk, and they set construction standards for flood-exposed areas, such as
floodplains. Private insurers sell the flood
insurance policies on behalf of the government, but they do not bear the risk.
Homeowners can obtain basic flood coverage as an option that can be added to
fire and theft coverage, but their eligibility
for NFIP funds requires pre-approval.
Flood insurance policies cover direct damages from a range of flood types, includFlood insurance systems

Regulated tariff
flat premium

Bundled / Compulsory

Free market
risk adjusted









National flood insurance models generally fall into one of the four categories: public and optional
(United States), private and optional (Germany), private and bundled (United Kingdom), or public
and bundled (France). Spain, France and Switzerland all have compulsory insurance schemes.

ing losses caused by erosion and mudslides. The programme is back-stopped by

the federal government when NFIP funds
are exhausted after large flood events. Despite this public subsidy, the vast majority
of homeowners choose not to purchase
flood coverage. The advantage of the
NFIP is the fact that the US has been able
to put together very detailed flood risk
maps. But the system is not very successful since it promotes, rather than limits,
adverse selection. Only those homeowners with a mortgage and a home that is
in a 100-year-zone are obliged to buy flood
insurance. That means the premiums are
inadequate and too high for those living
on the border of a 100-year-zone. At the
same time they are too cheap for those living in areas exposed to higher flood risk.
The NFIP has debts of USD 18 billion and
is economically not sustainable. The system also tends to underestimate the accumulation of risk from storm surge, as demonstrated when Hurricane Katrina hit New
Orleans in 2005. For all of these reasons,
reforms to the NFIP are regularly placed
on the political agenda and include concepts for privatising flood insurance in the
United States.
Germany (private and optional)
In Germany, private insurance companies
offer coverage to homeowners as an optional supplement to building and content
insurance. The insurance industry has
developed a detailed flood risk map used
by all players, so that risk-adequate premiums are generally guaranteed. But this
supplemental policy is voluntary for property owners and covers losses due to
flooding and heavy rainfall, as well as earth
quake, land subsidence, avalanche and
snow loading. Property damage caused
by wind and fire is covered by standard
building and contents insurance policies.
Storm surge, however, is considered by
the local insurance industry an uninsurable
risk and excluded from supplemental policies. The market penetration of standard
building insurance is high, as banks generally require it to secure loans. But the
penetration of supplemental hazards insurance is generally much lower throughout Germany as most homeowners do
not choose to purchase flood coverage. In
many regions it is still below 10%. There
is a higher penetration rate in Eastern Germany and Baden Wrttemberg due to
former compulsory schemes. But poor
take-up presents serious challenges for
the government and insurers after major
flood events. Flood relief paid by govern-

Swiss Re Flood an underestimated risk 17

Flood insurance solutions

ments to homeowners who do not buy

insurance further erodes efforts by private
insurers to sell coverage. However, the
penetration rate is increasing due to advertising campaigns, such as in Bavaria and
Lower Saxony.
France (public and bundled)
In France, the government has established
a programme covering losses that result
from flood, earthquake and a number of
other natural hazards. All homeowners
purchasing fire and theft insurance are required to participate. The price of coverage is set by the government and is uniform across the country, so it does not
reflect the actual risk of loss. That means
that highly exposed homeowners benefit
from the system, while those exposed
to low risk pay a disproportionately high
premium. Political processes are used to
determine specific events that trigger the
payment of claims. The programme has
been successful in securing broad participation as it has a very high penetration
rate. But this model provides no incentives

The possibilities of introducing flood insurance are

as varied as the circumstances faced by different risk
communities. Country surveys have shown that
widely different approaches can in fact work as long
as the basic principles of insurability are met.
to property owners to participate in damage risk reduction: it transfers risk, but
it does not incentivise reducing the risk of
United Kingdom (private and bundled)
In the UK, some 2.2 million homes (10%
of the total number of homes in the UK)
are at risk from coastal or inland flooding.
In 1961, a Gentlemans Agreement was
established between insurers and the UK
government to loosely define each partys
responsibilities. The result of this partnership was a bundled system for private
natural catastrophe insurance, which
makes flood insurance available as part of
standard home insurance policies, generally included in content and building
policies. This has helped to increase the

18 Swiss Re Flood an underestimated risk

insurance penetration rate, and flood

insurance including storm surge is
available at affordable premiums. The
pricing of policies is differentiated to reflect risk, so that homeowners with a
higher flood risk are charged more than
those with lower risk. The government
has an important role to play in making
flood insurance feasible in the UK. Its
main responsibilities are guaranteeing
quality flood maps, adequate flood
defences and effective land use, which
includes incorporating the concerns of
the insurance industry in land use planning decisions that are affected by flooding. Individual property owners have a
significant role in the UK flood insurance
system, too, by paying risk-based insurance premiums and deductibles. In cases
where flood risk may be significant,
households may be involved in reducing
flood risk to guarantee their insurability.
So while insurance is not compulsory in
the UK, most types of flood risk are covered by flood insurance under its bundled
system, and the vast majority of households are covered for flood damage. But
unfortunately, risk-adequate premiums
are not charged by all players. According
to the Statement of Principles, older contracts in high-risk areas cannot exclude
flood insurance. This is only possible in
newer contracts. As a result, old contracts are typically cross-subsidized by
low risk premiums. On the other hand,
new companies can exclude high-risk areas from new contracts and do not need
the cross-subsidy. Since they can offer
cheaper premiums in low-risk areas, many
customers move to new insurers. This
leaves high exposed risks to the established insurance companies. This is another type of adverse selection. The
Statement of Principles comes to an end
in 2013, and discussions are taking
place how flood insurance can be kept
widely affordable in the UK after that.

Implications for improved flood

While these country case studies show
that floods are insurable, there is still plenty
of potential for improvement in flood insurance. For example, insurance penetration is still low in many markets, even in
regions with a pronounced risk and corresponding demand for insurance cover
among companies and private persons.
This is a challenge which the insurance
industry must take up. Conversely, where
flood insurance is already widespread,
the terms and conditions of cover are often in need of improvement.
Over the last ten years, the insurance industry has made tremendous progress in
modelling the risk of natural disasters.
State of the art risk models, knowledge in

ly address the issue of adverse selection.

By comparison, the bundled system
generally leads to higher flood insurance
penetration rates, as it allows insurers
to spread out flood risk over time, across
perils and across rating areas. Since
homeowners who live in areas that are at
relatively low risk of flooding will have
to purchase flood insurance, a very large
insurance community can be created as
market penetration will be high, thereby
overcoming the problems of mutuality
and economic viability.
If risk-based insurance coverage is provided, a bundled insurance program can
be equitable because those with a lower
risk of flood will pay less for flood coverage, whereas those with a higher risk of
flood will pay higher prices. Official flood
hazard zones, such as those provided in

Since risk prevention and risk transfer go hand in hand, the most effective
flood insurance schemes are those which involve an active and continuing
relationship between the insurance industry and the relevant government
agencies responsible for flood protection.
structuring direct insurance and reinsurance cover with sufficient scope, and
spreading the risk through all forms of traditional and non-traditional reinsurance
solutions are invaluable assets offered by
the insurance industry. But insurers cannot do it alone. Since risk prevention and
risk transfer go hand in hand, the most
effective flood insurance schemes are
those which involve an active and continuing relationship between the insurance
industry and the relevant government
agencies responsible for flood protection.

the US or Germany, are particularly helpful in these instances. Further, under

some flooding scenarios, for example extreme rainfall, many homeowners can
experience flooding despite their location
being within or outside of identified
floodplains or coastal flood risk areas.
Thus, although some cross-subsidisation
may be required under the proposed
insurance model, every homeowner who
purchases flood insurance has the
potential to benefit from flood coverage.

These can take various forms, as described earlier. But each has its advantages and disadvantages. One of the primary
problems with the optional flood coverage approach is that it does not effective-

Swiss Re Flood an underestimated risk 19

Flood insurance solutions

Climate adaptation and flood risk:

The case of Hull
The city of Hull provides a compelling example
of how a systematic risk management approach
can help to reduce potential losses from floods
and other hazards while promoting economic
development in a region that exhibits a growing
concentration of assets at risk from climate
change. But while climate adaptation is an urgent priority for the custodians of national and
local economies exposed to rising flood risk,
such decision-makers ask: What is the potential climate-related loss now and over the
coming decades? How much of that loss can
we avert, with what measures? What investment will be required to fund those measures
and will the benefits of that investment outweigh the costs?
Situated at the confluence of two rivers on
Englands North Sea coast, the city of Hull is
under constant threat from flooding. In addition to its exposure to freshwater floods after
heavy rainfall, Hull is at risk from the impact
of strong windstorms and coastal flooding. The
area is also economically deprived and under
regeneration, which increases its vulnerability.
When flooding struck the British Isles in the
summer of 2007, Hull was among the worst
affected communities despite the relatively
good protection package already in place:

The implication for city authorities is that Hull

would clearly benefit from strengthening
its climate resilience. The ECA analysis shows
that the combined risk from flooding and
wind storms will increase further in a changing
climate. While today the annual expected
economic loss for Hull amounts to some
USD 56 million, economic growth will increase
the annual expected loss until 2030 by USD
23 million. Rising sea levels, more storms and
rainfall caused by climate change could push
this figure up by an additional USD 17 million.

Some 35000 people 15 percent of the

population were evacuated from their
homes. And 7800 houses, 1300 businesses,
and scores of public buildings were damaged,
including 100 schools in Hull and its surrounds. In total, the disaster caused losses of
around USD 300 million (GBP 195 million).
Luckily many residents had flood insurance
and were compensated. But this event was
reason enough for the city authorities to look
again at strengthening prevention measures,
considering what is already at stake today
and asking what will be at stake tomorrow?

But the good news is that up to 65% of expected losses can be averted cost-effectively
To give local decision makers the facts they
through measures that have net economic
need to design a cost-effective climate adapbenefits! These include flood awareness camtation strategy, Swiss Re together with
paigns, emergency response training, imother public and private partners developed
provement and repair to Hulls existing sea and
a practical methodology on the economics
river defenses, and mobile protection for
of climate adaptation (ECA). It quantifies the
household contents through provision of large,
overall risks faced by local communities and
waterproof, re-sealable bags to residents.
assesses the costs and benefits of various adaptation measures in their area. In so doing,
the ECA approach seeks to pro-actively manInsurance is a less costly option than many
age total climate risk based on a rigorous
other physical prevention measures; it constirisk assessment. It assesses total climate risk
tutes an important component of the citys
in a given location, taking into account the
adaptation portfolio to protect assets against
risk presented by todays climate, the economic
the impact of high-severity, low-frequency
development paths that might put greater
flood events.
population and value at risk in the future and
the additional risks driven by
curve for Hull, UK
climate change
In a second step, the ECA High
a prioritized portfolio of adaptation measures
to address total climate risk in the most economically sensible way.
6.0 Cost/benefit
~65% of total expected loss
can be averted cost-effectively


cost curve for Hull, UK
High climate change scenario

Measures below this line

have net economic benefits

Source: Report of the Economics of Climate Adaptation Working Group 2009

Todays annual potential loss for Hull, UK is around USD 56 million.

Under the high climate change scenario, and taking into ccount
economic growth, the risk increases by up to 71% by 2030 to USD
96 million.

The cost curve shows that 65% of the loss can be cost-effectively
averted by prevention measures, such as flood awareness campaigns, sea defences, sandbagging and improved drainage systems.
Insurance covers another 15% of the expected loss and is more
cost-effective than many other prevention measures.

20 Swiss Re Flood an underestimated risk

Roof netting existing buildings 6.20

Averted loss (USD m)

Source: Report of the Economics of Climate Adaptation Working Group 2009

Source: Report of the Economics of Climate Adaptation Working Group 2009

Roof netting existing buildings 6.20

Foof foam existing buildings 5.60


Foof foam existing buildings 5.60



Stronger roof fixings existing buildings 5.60

Stronger roof fixings existing buildings 5.60

Averted loss (USD m)
Closed cell insulation existing buildings Closed
4.80 cell insulation existing buildings 4.80


Flood proofing of floors existing buildingsFlood

3.30proofing of floors existing buildings 3.30


Build new buildings on podium 1.68

Closed cell new buildings 1.90
Sandbag buildings general 2.15

550 700

Increase drainage systems 0.77

River Hull defence 0.13




Build new buildings on podium 1.68

Closed cell new buildings 1.90
Sandbag buildings general 2.15


Sandbag buildings strategic location 0.65

Sandbag buildings strategic location 0.65

2030, total
expected loss

Hydraulic barrier upgrade 0.39

Incremental increase
from climate change


Hydraulic barrier upgrade 0.39

Incremental increase
from economic
growth; no climate

Flood awareness campaign 0.01

2008, todays
potential loss

Measures below this line

have net economic benefits

River Hull defence 0.13


Sea defence west 0.08


550 700

~65% of total expected loss

can be averted cost-effectively

Sea defence west 0.08


Sea defence east 0.03


Sea defence east 0.03


Potential impact from

economic growth

Flood awareness campaign 0.01



Increase drainage systems 0.77

6.0 Cost/benefit

Potential impact
from change in climate

Flood proofing of floors new building 0.49

Flood proofing of floors new building 0.49


Mobile protection for content 0.25


Train staff in emergency response 0.28


Mobile protection for content 0.25


Train staff in emergency response 0.28

Annual expected loss from exposure to climate

High climate change scenario, USD millions

Of the many different arrangements

found in countries around the world, the
UKs private, bundled approach to flood
insurance offers one of the best examples
of effective partnership in which responsibilities between the insurance industry,
the government and individuals are clearly defined. Germany and Australia have
recently demonstrated that increasing insurance penetration can also be achieved
without a compulsory or bundled cover.
However, optional systems only work if
detailed flood risk information is available
and risk- adequate premiums are charged.
The high cost of flood insurance in highrisk areas gives property owners little incentive to buy flood insurance. On the
other hand, low-exposed risks pay very
low premiums which almost every property owner can easily afford. Large events
and large advertising campaigns have
demonstrated the value of flood insurance
in Germany and Australia and have led to
an increase in flood insurance penetration

The insurance industry has greatly improved its

capacity to model flood risk. But more efforts
are needed to minimise the risk of flooding and
keep it insurable.

Non-traditional solutions
Flood insurance for homeowners on a
countrywide basis is one form of protection
that insurance companies can offer. But
the range of solutions is much broader
and includes parametric reinsurance, micro insurance and insurance-linked securities (ILS).
With parametric re/insurance or capital
market solutions, the payout in the case
of a loss is determined by a physical trigger or an index, not by the actual loss incurred. But to set up parametric solutions
for flood is quite complex, since flood
has so many facets. A parameter used to
measure rainfall, for example, might not
be suitable to cover other types of flood
like a river flood or a dam burst. In addition, precipitation might occur far away
from the area that will actually be inundated. Hence, it is important that each
solution is custom-made and specifically
designed to the needs of the insured.
But parametric solutions have great advantages: They do not require loss adjusters to tally damage after a catastrophe
occurs, a process that can take months or
even years and which can delay a payout.
A parametric trigger is transparent, both
for the insured and for insurers, and it
means that loss events can be handled
faster and more efficiently than with
other kinds of insurance-based solutions.
Basis risk is the biggest challenge for
parametric solutions. It is the risk that the
actual payout for the insured party in a
specific loss event is lower or bigger than
the actual loss incurred. However, there
are means to reduce basis risk. The best
way to do so in the case of parametric
flood solutions is the use of flood footprints
which outline those geographic areas
that are actually inundated. Remote sensing has greatly advanced this capability.

Swiss Re Flood an underestimated risk 21

Flood insurance solutions

The number of satellites and their resolution has increased in a way that detailed
footprints for flood events can be determined. Flood detection is mainly done by
radar sensors which operate day and
night and penetrate cloud covers.
Another innovative approach is the use
of micro-insurance. In 2011, Swiss Re
helped implement a hybrid solution that
combines a parametric and basis risk
insurance cover for micro-entrepreneurs
in Haiti through the Microinsurance
Catastrophe Risk Organisation (MiCRO).
It protects against rain, wind and earthquake risks. The rain cover is based on
rainfall measurements using satellite data.
That has the advantage of being less
susceptible to manipulation. The policy
was triggered twice during the summer
of 2011 after heavy rainfalls struck Haiti.

Public-private partnerships:
the role of government
The task of effectively reducing and
financing catastrophe risk requires a
combined response by both private
and public sector players. While the
public sector plays a key role in setting
a legal framework that enables the development of a private insurance sector,
its the primary role of private insurers
and reinsurers to develop appropriate
risk transfer solutions and to absorb and
manage those risks most effectively.
But in developed countries with a functioning insurance market, there is no
need for the government to actively absorb natural catastrophe risks. In countries where the insurance market is not
yet sufficiently developed, the government may need to play a more active
role as an enabler of risk transfer. In addition, governments themselves may
choose to buy private insurance coverage in order to pre-finance public disaster expenses.
Governments as rule setters: The
public sector has the political and legal
power to set rules and regulations that
enable the insurance market to absorb
large losses. These include setting
capital and licensing requirements for
insurers, providing access to inter
national markets, defining the terms

22 Swiss Re Flood an underestimated risk

of liability, supporting preventive measures, etc. In some situations, governments can help expand the availability
of risk transfer solutions to individuals
and corporations by introducing compulsory insurance schemes to create a
sufficiently large risk community. In
many cases, the public sector and the
insurance industry are implicit partners.
Insurers will only insure against floods
if the government implements flood
prevention measures or against fire if
fire brigades exist.
Governments as sponsors and
facilitators of an insurance market:
Where an insurance market does not
yet exist as is often the case in
developing and emerging markets
governments and non-governmental
organisations can play an important
role in facilitating the development of
risk transfer solutions. This may involve
collecting exposure data and supporting risk research and modelling to enable new insurance solutions. In addition,
governments can encourage the development of an insurance market by
initially subsidising insurance premiums.

The proceeds were swiftly released to

help the affected micro entrepreneurs
to cover their losses and begin the reconstruction process.
The demand for ILS solutions for flood
has been limited, but that could change.
So far we have only seen one example
of a cat bond that covered flood risk. In
2007, Swiss Re structured and placed
on behalf of the German insurer Allianz
USD 150 million of insurance-linked
securities (Blue Wings Ltd.) covering flood
in Great Britain and earthquake catastrophe events in Canada and the United
States. Blue Wings was the first insurance-linked securities program to provide
cover against flood. To calculate river
floods, at least 50 reference locations
across Great Britain were used to measure flood depth. For an event to trigger

Governments as re/insurers: In many

countries, governments also act as
insurers or reinsurers for certain risks in
order to supplement private insurance
schemes. Government backstop programmes can effectively facilitate a limited private-sector insurance solution
wherever risk assessment is a particular
challenge and where the magnitude of
a potential loss exceeds the capacities
of the private sector, such as in scenarios involving terrorism or extreme
natural catastrophe tail risks. For most
weather-related and other natural catastrophe risks, however, the private
sector has the capacity and expertise
to provide sufficient coverage. Here,
the public sector should limit its direct
involvement and focus its intervention
on expanding the availability of insurance schemes with the ultimate aim
of establishing an efficient private-sector market.
Governments as re/insurance buyers:
As the private sector has the expertise
and capacity to insure disaster risks,
governments can also buy private insurance coverage themselves. This enables the public sector to fund disaster
expenses before a catastrophe occurs.

Overview of national flood insurance systems


Main hazard(s)

Insurance carriers

Insurance cover

Insurance penetration

Inland and coastal river
Various insurers offer flood

floods; flash floods; low storm insurance, both personal

surge risk
lines and commercial lines

The general industry provides

flood cover to properties
throughout Australia with over
half of all home policies
offering cover, which is
expected to increase to eight
in ten policies by 2012/13

Residential risks. Moderate

but increasing

River floods (esp. due
No flood cover offered to

to melting snow and heavy

rainfall); flash floods;

low storm surge risk

River floods; flash floods;
Only private insurers offer

substantial storm surge risk
flood cover

North Sea coast

Flood losses not covered by

traditional insurance policies;
separate cover for industrial

Residential risks: none;

Industrial risks: high

River floods;
State monopoly in 19 of 26

flash floods
cantons; private insurers cover

content and business inter
ruption (BI) in cantons with

state monopolies. They cover

buildings, content and BI in

other cantons.

Storm surge; widespread
Only private insurers offer

inland river floods rare;
flood cover

flash floods may follow heavy


River floods; flash floods;
National Flood Insurance

storming surges following
Program (NFIP) for basic cover

in areas exposed to flood risk;

private insurers offer additional


Full value cover,

dam failure excluded

Practically 100%

Insurance cover included in

content policies, dam failure
included; cover available in
industrial fire/named/all risk

Residential risks:
95%; Industrial risks:
almost 100%

NFIP covers losses from river

or flash floods, erosion,
subsidence and storm surge
in eligible areas; caps
on coverage; no BI covers

Residential risks:
medium in NFIP risk areas;
Industrial: high in risk-areas

Extended natcat insurance

Residential risks: low,
available for flood; all-risk
but growing; Industrial risks:
solutions available for industrial low
risk; no cover for storm surge
at all

Source: Swiss Re

Parametric insurance solutions can have clear advantages over traditional

insurance schemes. They do not require loss adjusters, a process which
can delay payout, and they are transparent both for the insured and for insurers.
these bonds, river segments connected
with at least four reference locations must
be designated a severe flood warning
area by the UK Environmental Agency.
The demand for ILS solutions might
increase in the future, since the Pan-European Risk Insurance Linked Services
(PERILS) company began providing market loss estimates for UK flood. Future
cat bonds could be based on that data.
PERILS is an independent company

formed by eight shareholders in the re/insurance industry. PERILS aggregates industry-wide exposure and claims data for
Europe. That improves the transparency
of industry losses.
There is a strong demand from governments and municipalities for such
innovative solutions as they seek advantages such as cost efficiency, speed
of payments and moral hazard.

Swiss Re Flood an underestimated risk 23

Aerial view of a residential area in Milton, a suburb of Brisbane, during the Great Brisbane flood of 2011. This was the worst flooding
disaster in Australias history. The image includes a submerged parkland.

24 Swiss Re Flood an underestimated risk

Flooding could affect any of us, taking
away our belongings and destroying our
homes. With a good insurance cover,
however, flooding does not have to turn
into a disaster at least not financially.
But as discussed in this publication, flood
insurance is often not widely available
or affordable, despite the fact that there
is no reason for this as long as the basic
principles of insurance are met.
What is important is that all participants
have to play their part and contribute
to a sustainable solution. That means that
the government has to set the rules and
guidelines for insurance schemes. It must
also actively promote and implement

prevention measures, including building

codes. Geographic areas that are flooded
too regularly and suffer severe losses
every time should be cleared, while riskadequate premiums provide incentives
for people to relocate to safer ground.
What matters is that the insurance sector
can only offer flood protection when it
can draw on a sufficiently large risk community. Besides risk-adequate premiums,
compulsory schemes or when not mandated by law a bundled system based
on a wider risk portfolio can come a long
way in making flood insurance economically viable and more widespread.

Flood insurance is commercially viable only if it is backed by a sufficiently large

risk community. But those locations that are flooded too regularly and suffer
severe losses every time a flood hits should be permanently evacuated, with
risk-adequate premiums encourging people to move to safer ground.

Swiss Re Flood an underestimated risk 25

Swiss Reinsurance Company Ltd

Mythenquai 50/60
P.O. Box
8022 Zurich
Telephone +41 43 285 2121
Fax +41 43 285 2999

2012 Swiss Re. All rights reserved.

Flood an underestimated risk
Inspect, inform, insure
Principal contributors:
Jens Mehlhorn, Peter Hausmann
Writing and realisation:
Katharina Fehr, Patrick Reichenmiller
Managing editor:
Ingo Buse
Graphic design and production:
Swiss Re Logistics Media Productions, Zurich
Visit www.swissre.com to download or order
additional copies of Swiss Re publications.
Order no: 1505435_12_en
07/12, 2000 en