ILS could help with Florida’s costly rising sea levels, floods and surges


Recent commentary on the increasingly costly and damaging impact rising sea levels and adverse weather events has on Florida’s coastline, highlights the potential for the insurance-linked securities (ILS) market to provide solutions and capacity, mitigating the risks.

Miami beach floodingCatastrophe risk modelling firm RMS estimates that by the year 2030 a staggering $15 billion could be lost in Florida property, as rising sea levels and extreme weather events, resulting in severe flooding and storm surge along the region’s coastline intensify.

That’s a heavy economic toll expected, which will translate into high levels of insurance and reinsurance industry losses in years to come. With resilience efforts not currently keeping pace with the growing threat, there is a clear need for risk capital and risk transfer to put in place the financing needed for recovery and also to help support resilient infrastructure projects.

Despite no hurricane landfalls occurring in Florida during the last ten years, the region’s coastlines are increasingly susceptible to storm surge and flood events, which cause widespread damage to properties and businesses.

And while the insurance-linked securities (ILS) market has been utilised to issue catastrophe bonds to provide the required capacity to insure against Florida named storms, and hurricanes, the increasing threat of flooding and surge events is something that would benefit from similar attention.

Although limited, catastrophe bonds featuring flood protection and storm surge coverage have been a feature of the market, with the most recent being the $275 million PennUnion Re Ltd. (Series 2015-1) issuance from Amtrak, covering U.S. storm surge & wind from named storm, and U.S. earthquake.

And now, with advancements in the understanding and analysis of storm surge events and the resulting costs combined with improved modelling capabilities, and heightened awareness from global organisation, such as the NOAA, the ability to structure a flood, or storm surge cat bond for Florida coastal areas becomes more accessible.

As with the PennUnion Re deal mentioned previously, and the 2013 MetroCat Re Ltd. (Series 2013-1) issuance, which covered storm surge and included named storm exposure, a parametric trigger structure would ensure rapid payout post event.

Structured to trigger when storm surge or flooding causes water levels to go beyond a certain height, for example, a cat bond for Florida utilising a parametric trigger could create an efficient and effective solution to the potential for rising property claims.

As well as the potential for catastrophe bonds to support Florida’s expected future flood and surge risk transfer needs, other insurance and reinsurance products are also available and likely to gain increasing focus as the threat increases.

Parametric insurance and reinsurance covers are increasingly becoming available, with companies such as Floridian managing general agents New Paradigm Underwriters developing ways to help anyone from corporations and private clients, up to reinsurers, better protect themselves against flood or surge risks.

Some of the capacity that will end up backing these products will come from the ILS market and its funds, as the larger ILS managers look to ensure they access whatever parametric disaster risk comes to market.

Flood risks across the U.S. are vast and predictions are for further exposure, seriously putting at risk homes and business that rest on, or near coastlines. And in places like Florida where asset and property values are high, the economic and insurance industry loss potentials will likely rise also.

So as well as providing comprehensive solutions to the Florida storm surge and flood landscape, ILS products would also supply the necessary risk capital to insure against the risks. Supporting the insurance and reinsurance market, while bringing some diversification to investors in the space.

Supporting the use of cat bonds and reinsurance to assist with U.S. flood exposures, the National Association of Mutual Insurance Companies (NAMIC) has suggested previously to the United States House of Representatives, that the U.S. National Flood Insurance Program would benefit from transferring risk to the private sector.

As the risks increase and the ILS market continues to grow in size and broaden its reach, it will be interesting to see if any innovative storm surge or flood cat bonds come to fruition and help protect Florida’s coastal regions.

Of course, while risk capital is key to supporting the insurance of property facing these risks, there is additionally a need for a sensible review of planning, development, building codes and urban resilience. Without these efforts, the use of ILS to transfer these risks and insure them becomes futile and the deployment of capital needs to be effected with resilience in mind.

As such the development of initiatives such as the Re:bound program, which leverages the catastrophe bond structure to help manage the financial risk from catastrophes, as a typical cat bond would, while also promoting investment in resilient infrastructure projects that mitigate physical risks, are important and could provide a way to better secure the future of Florida’s coastline.

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