Floods/reinsurers: secondary perils become primary threats
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Germany has been hit by the worst floods in 50 years, with tragic loss of life and insured losses set to exceed €4bn. A city in central China recently claimed rainfall was the heaviest for 5,000 years. On Sunday, parts of London were inundated for the second time in a month. The rise in extreme weather events exceeds climate modellers’ predictions. Insurers and investors need to get a grip on the resulting risks.
The insurance sector is already counting the cost of recent disasters. For the reinsurance industry European floods have cost between €2bn and €3bn, Berenberg estimates. But households and businesses may bear the brunt. Some 55 per cent of German buildings are not insured against floods and heavy rain.
Amid the misery, there is a business opportunity for insurers. Flood risk remains one of the most underinsured risks across Europe. This is partly because of automatically high premiums across swaths of low-lying land.
In the US, where flooding is the most common and costly natural peril, at most 15 per cent of homeowners are insured, says Munich Re. Along with other reinsurers, it has been trying to close the gap in recent years.
Plenty of capital is available for the reinsurance sector, thanks to low interest rates. Big data can put it to work, distinguishing better between medium and high-risk properties. Topographical, meteorological and corporate statistics are already being harnessed.
BlackRock of the US has embarked on asset-level analysis of company exposures, as has MSCI. The index provider has estimated that approximately 7 per cent of facilities operated by constituents of its global equity index are threatened by coastal flooding risk.
Advanced flood risk models are more granular than traditional ones. But they are still far from adequate. Swiss Re recently cut back its exposure to “secondary perils” — high-frequency, low-to-medium-severity events such as flash floods and droughts. In February it told investors these were harder to model than hurricanes or earthquakes.
Secondary perils are gaining primary importance. Last year they accounted for more than 70 per cent of $81bn in insured losses from natural catastrophes, according to the Swiss reinsurer.
Higher premiums are inevitable, even if Germany follows the UK in spreading a proportion of flood risk costs across all home policies. Longer term, better models are crucial to keeping a lid on costs. The appetite of reinsurers for flood risk depends on how well they can assess it.
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