JBA’s new UK flood model could help Flood Re sponsor a cat bond

A newly launched high-resolution, multi-peril UK flood model from JBA Risk Management, designed to help insurers and reinsurers to work with the governments Flood Re reinsurance facility, could also be applied to help issue a UK flood catastrophe bond.

There has only been one UK flood cat bond in the history of the market, Allianz’s 2007 parametric Blue Wings Ltd. catastrophe bond. But with the focus in the UK moving to getting more flood risk insured and helping to shift that risk into the private reinsurance and risk transfer markets, via UK government established Flood Re, the time to revisit the UK flood cat bond may be now.

JBA Risk Management’s new UK flood model, launched today and developed alongside reinsurance broker Guy Carpenter who has worked on the Flood Re facility and its retrocession provisions, includes river, rain and surface water (pluvial), and coastal flooding for the whole of Great Britain and Northern Ireland.

That makes the model unique, JBA says, offering the insurance and reinsurance market access to a probabilistic UK flood model right at the time the Flood Re facility is gearing up for launch and when insurers and reinsurers both want to understand the opportunity this presents to them.

Jane Toothill, director at JBA Risk Management, commented on the launch; “The model allows insurers to better understand which risks should be ceded into Flood Re and reinsurers to quantify the risk associated with the Flood Re portfolio.”

The fact that the JBA UK flood model can help reinsurers to understand the Flood Re portfolio will be of value to those wanting to participate in the retrocession program. To date that only includes traditional reinsurers, but the second phase of the retro program has seen interest from ILS funds we understand, so in future the model may help ILS managers to better understand UK flood risks.

Toothill continues; “The model will also be available to insurers and reinsurers who wish to fully quantify and understand their risk due to flooding in the UK. Although Flood Re will only be reinsuring domestic property, the model is comprehensive. It also includes commercial and industrial buildings.”

So not just applicable to Flood Re, but providing broader application to reinsurers and ILS managers who want to assume UK flood exposures from cedents in the traditional insurance market directly, rather than via a retro agreement with Flood Re.

Vic Jenkins, managing director, head of technical innovation EMEA for Guy Carpenter, added; “The completion of the JBA UK Flood model for the first time provides access to a truly holistic modelled view of flood risk from all perils and for the entirety of the UK. As insurers are refining their Flood Re cession strategies, this provides additional insight to aid understanding and provide more clarity to that ‘to cede or not to cede’ decision making process.”

The new JBA UK flood model uses both a specially created multi-peril stochastic flood event set, as well as the incorporation of 5 metre resolution hazard mapping for all three flood related perils. The event set contains hundreds of thousands of plausible flood event scenarios which have been grouped into years. Events can be analysed on the basis of one, two or three of the flood perils covered.

The UK’s Flood Re has already secured £1.29 billion of traditional retrocessional reinsurance coverage, but is expected to return to the market for another layer of cover, amounting to a further £720 million or more of retro in a second deal to take it to £2.1 billion of cover.

We understand that the ILS market has shown interest in this second layer and that there have been discussions regarding the appetite among ILS investors for a flood catastrophe bond.

The JBA UK flood model, having been designed with Flood Re in mind to help those providing it with reinsurance to better analyse its exposures, could be just the tool that is needed should the UK government decide to test the water with a Flood Re cat bond.

The JBA model includes up to date information on river flood defence data from the relevant government bodies for all regions of the UK, vital for any flood modelling today.

With UK flood a peril that the ILS and catastrophe bond market investors would be keen to add to their portfolios, any Flood Re cat bond, or UK flood cat bond from another sponsor, would likely see great demand.

But of course one of the elements necessary to stimulate that demand is the availability of risk models that can give investors a thorough view of the underlying risk and the probabilities of the cat bond attaching. That’s where JBA believes it can step in.

Iain Willis, JBA Risk Management’s Technical Director, told Artemis; “In my view, there’s no reason why the UK model and JCalf® (JBA’s catastrophe modelling platform) couldn’t be used as the modelling agent for placing a UK catastrophe bond on either an indemnity or industry loss trigger.”

Flood hazard maps created by JBA are already used by over 80% of the UK insurance market for underwriting purposes, meaning that many in the market are familiar with the way JBA approaches flood risk.

The new model could offer a unique opportunity to assess accumulated UK flood risk on a platform accepted in the market, while also providing a unique opportunity to help transfer some of Flood Re’s exposure to the capital markets, either by reinsurance or perhaps by a UK flood catastrophe bond.