IoT sensors and satellite imagery to play key role in future of parametric flood insurance: Swiss Re

A new report from global reinsurer Swiss Re has outlined that an array of sensor technologies has transformed how flood risk can be measured, from Internet of Things (IoT) flood sensors and satellite imagery to remote sensing and high-resolution flood models, all of which can play a key role in the future of parametric flood insurance.

Flood risk is widespread and highly correlated, with single events capable of damaging tens of thousands of properties.

According to Swiss Re Public Sector Solutions, flood risk is among the most prevalent weather-related hazards, impacting nearly one-third of the global population. But, despite this, roughly 80% of flood losses remain uninsured.

Consequently, Swiss Re outlines that traditional indemnity insurance often excludes flood damage, citing that effective adaptation measures, paired with insurance innovation, remain critical elements to help boost and drive resilience for this intensifying risk.

“One innovation – cost-effective parametric flood insurance solutions that pay out quickly when pre-defined thresholds are exceeded – has been gaining traction in both emerging and developed economies. Adoption of parametric solutions has been supported by technological advances including granular flood mapping tools, remote sensing, satellite imagery and Internet of Things (IoT) sensors, to more precisely assess flood risks and accurately determine when catastrophic events trigger policyholder payments,” Swiss Re’s report explained.

Adding: “As sensors become cheaper and more accurate, their data can increasingly be integrated with satellite imagery and other information to capture different dimensions of flooding. A comprehensive, multi-source approach that harnesses the strengths of each technology to improve reliability, reduce basis risk, and strengthen consumer confidence will help accelerate the adoption of parametric insurance as a core component of flood risk transfer.”

The firm goes on to highlight how in recent years parametric flood insurance has emerged as an alternative instrument that can provide fast, efficient payouts to help policyholders quickly recover from events.

Additionally, Swiss Re also acknowledges that parametric flood insurance was historically limited in terms of data availability and accuracy.

Early products used within parametric flood insurance often relied on indirect, or proxy, measurements to estimate flood risk. These proxies typically included rainfall totals, readings from river and tidal gauges, precipitation detected by remote sensing, and outputs from hydrological and hydraulic models.

However, while these methods helped provide a solid foundation for index-based insurance triggers, they often fell short in terms of precision and direct observation, Swiss Re explained.

“More recently, however, technological advances in monitoring and computing systems have unlocked far greater potential for parametric flood coverage. Sensing and computing technologies have significantly improved the ability to monitor flooding events directly. Synthetic Aperture Radar (SAR), in-situ Internet of Things (IoT) flood sensors including floats, pressure transducers, radar, ultrasonic, and LiDAR devices, and integrated hydrologic modeling now allow for direct observation or high-resolution modeling of flood conditions,” the report reads.

Adding: “These technological improvements facilitate the construction of more accurate flood event indices and increase confidence in the triggering mechanisms of parametric flood insurance products. With these advances, numerous partnerships have emerged between IoT companies and specialized carriers that offer parametric insurance solutions designed to expand flood coverage and narrow the protection gap.”

However, Swiss Re also cautions that relying on a single data source may create new vulnerabilities. Even approaches that appear promising may not work on their own, particularly if they prove too costly to deploy.

To conclude, the reinsurer outlines that the urgency of global flood risk demands decisive action.

“By embracing advanced sensor technologies, integrating diverse data sources, and investing in robust modeling frameworks, industry leaders can create solutions that bolster resilience and speed recovery following catastrophic events.

“Ultimately, establishing industry standards will bring down costs and help scale parametric insurance for flood risk. Replicability is key, because data cost remains highest for flood risk solutions, compared to virtually all well-established parametric solutions for risks associated with other natural catastrophes and weather perils.

“To accelerate this process, insurers, intermediaries, and technology providers can collaborate as they innovate. Parametric flood insurance that leverages reliable multisource data is poised to deliver on this social and commercial imperative: safeguarding livelihoods, speeding recovery following catastrophic events and helping build a more resilient world.”