High resolution flood data from RMS an opportunity for risk capital

A new suite of high resolution Europe Inland Flood Hazard Data has been released by catastrophe risk modeller RMS, which the firm says provides global insurance and reinsurance firms (and perhaps ILS players) with a greater opportunity to write business for an underinsured risk.

Flood events across Europe can be far-reaching and extremely costly for insurance or reinsurance firms, and local governments, and as a result of flood exposures’ volatility and high costs, insurance penetration in flood is generally low, even in more developed markets.

A new suite of Europe Inland Flood Hazard Data from RMS, that offers the highest resolution view of the risk available on the market, according to RMS, aims to assist with increased flood insurance penetration across Europe by providing re/insurers with an opportunity to write more business.

“The latest RMS data suite represents an opportunity for (re)insurers to write a significant volume of new business in Europe, increasing the penetration of flood insurance and closing the protection gap that exists in the market, now that the right tools exist to understand the risk,” said Adrian Mark, senior product manager at RMS.

The new suite of data products includes the RMS Europe Inland Flood High Resolutions Maps, RMS Europe Inland Flood XML Accumulation Footprints, and RMS Europe Inland Peril Rating Databases, explains RMS.

The highest resolution view of inland European flood risk available on the market enables clients to avoid any substantial over, or under-estimation of flood risk, says RMS.

By providing detailed information on flood depth and extent at a 5m resolution that utilises methodology across 13 different European countries, clients are able to attain a greater view of the risk, which RMS feels could result in greater flood insurance take-up.

The fact that the methodology is consistent across 13 European countries, “is significant because more than a quarter of historical flood events in Europe affected more than one country at the same time,” explains RMS.

Throughout the first-half of 2016 insurers and reinsurers were negatively impacted by flooding as a result of storms, including storms Elvira and Friederike that battered parts of Germany.

Severe flooding from storms Eva and Frank resulted in insurance and reinsurance industry loss of more than £1 billion in the UK during December, while losses in France from severe flooding earlier this year also incurred losses of beyond the billion dollar mark.

“Because claims for floods tend to be more costly than for other perils, even a limited number of flood claims over a small area could lead to greater losses than from a windstorm affecting a much larger region,” explains RMS.

Underlining just how varied flood risk across Europe can be, RMS notes that depending on the country as much as 30% – 50% of the overall loss can come from pluvial risk, which includes small river flooding, flash floods, and localized heavy rainfall.

To address this, RMS explains that the new suite has been built using the new RMS pan-European Flood HD Models, which includes all sources of on, and off flood plain risk across a wide range of major and minor river networks.

“The consistency between data and probabilistic models makes the RMS Europe Inland Flood solution unique, and provides a suite of tools appositely designed for more informed flood risk management, from underwriting through to portfolio management,” said Mark.

Furthermore, the catastrophe risk-modelling firm explains that flood is one peril that’s impacts can be significantly mitigated through man-made defenses, both permanent and temporary.

In response, the RMS data suite provides both defended and undefended views of flood exposure with 70% of the data based on proprietary RMS research. “This opens up underwriting opportunities in well-defended locations,” says RMS.

Flood risk across Europe remains one of the costliest and most volatile exposures for companies and governments, and while efforts in the UK with the establishment of Flood Re and other flood loss mitigation and funding measures elsewhere across Europe aim to lighten the load, it remains an underserved risk.

The new suite from RMS aims to provide insurance and reinsurance companies with a more detailed and comprehensive view and understanding of flood across Europe, which could result in more opportunities for market participants to underwrite in regions they were previously unable to.

The capital markets and insurance-linked securities (ILS) fund managers also take a keen interest in developments surrounding flood risks, seeing it as a peak peril which ILS fund managers in particular are increasingly comfortable underwriting.

With reinsurance capacity levels high it is unlikely that the ILS markets will make a dent in the markets flood risk capacity needs anytime soon, but higher resolution data will help ILS players to better understand flood risks associated with storms which could be extremely useful.

In recent years Europe has been hit by increasingly violent storms in the summer months, with hail storms, torrential rain and flooding all a risk. ILS markets have been exposed to these events, through reinsurance and retrocession contracts, so enhanced flood data is key.

Additionally, ILS funds are exposed to major European flood events through reinsurance and retrocession and ILS investors through sidecar vehicles as well. So the release of the highest resolution European flood data by RMS is an important step in helping the ILS market better understand its exposures.

Finally, if we are to ever see a flood catastrophe bond issued covering European risks, high resolution data will be key to model a flood cat bond and to provide sufficient comfort in their understanding of the risk to the ILS investor community.

While this will enable re/insurers with an opportunity to access new business in parts of Europe and provide them with a new revenue stream, it will also help narrow the flood insurance protection gap, ultimately supporting the expansion and development of the European flood market.