Lack of investment in coast defences combined with a changing climate means that the average annual cost of flooding in England and Wales has risen to £1 billion according to a report referenced in the Independent newspaper. Over the next 30 years the cost of flood events in the UK will continue to rise as sea levels are predicted to rise by 40cm and this is where the scale of losses the insurance industry could face from flooding events becomes much larger.
A significant east coast UK flood event could cost as much as £16 billion by 2040, an amount that would strain insurers and cause losses to reinsurers of a magnitude previously unseen in the UK. Naturally, if the UK is hit by flooding of this magnitude due to sea level rises you can be sure that the rest of northern Europe would see comparable flooding and losses as well making any major north sea flood event a major loss for the re/insurance industry.
While the article we reference above discusses the cost of implementing flood defences, which could be huge, this prediction of the potential cost of flooding losses is another reminder that the re/insurance industry should begin to look to the capital markets for protection from these events.
Flood losses are forecast to rise on a global scale over the next 30 years, combine that with increasing development and growing value at risk in developing regions such as Asia, and you have the potential for worst case events that could cripple the re/insurance industry. You only have to look to last years Thai floods to see how large these losses can be.
So once again we raise the possibility that flood catastrophe bonds could be one solution that would allow these risks to be transferred to the capital markets efficiently. The capital markets are going to have to take more of the global reinsurance risk over the next decades as exposures grow to a level unseen before and the frequency and severity of natural catastrophe events are forecast to increase through our changing climate. Work is already underway to investigate the potential for these instruments with the help of PERILS AG’s inclusion of UK flood loss data which could result in the creation of industry loss indices that flood cat bonds could be triggered against.
Whatever happens, new reinsurance solutions are going to have to be created to manage growing risks from perils such as flooding to enable the sector to cope with them. As we’ve written before, flooding is the most common natural catastrophe and this report shows that the size of loss will increase with the frequency. We feel the capital markets will likely play a large part in this and the catastrophe bond and ILS sector have an opportunity to put themselves in a position to capitalise on this as a source of capacity for flood risk transfer.