Protecting businesses against flood risk
Flooding is a relatively well-modelled risk with probabilities based on historical data. For businesses seeking insurance protection this means that premium is likely to be fairly expensive, particularly for those firms with high risk exposure.
Companies in the UK face threats from nearby rivers bursting their banks after excessive rainfall or by tidal surges from the sea.
Flooding risk in the UK
Areas particularly at risk in the UK include Glastonbury in Somerset, Lancashire, Peterborough and Holbeach in Cambridgeshire, to name just a few examples.
Floodplains are similarly vulnerable to flooding from heavy rainfall, particularly if they are close to a river. Large examples include the Somerset levels and the East Anglian fens.
Other areas may be prone to flash flooding, either due to downpours or damaged drainage infrastructure. This risk tends to be higher in metropolitan areas. Regions frequently affected include Yorkshire, Wiltshire and Buckinghamshire.
The climate change effect
Historical data may no longer be sufficient to estimate flood risk as climate change is set to cause sea levels to rise and endanger coastal areas. Further, climate change is expected to cause more frequent and forceful storms and downpours. The past February has set another historical record for rainfall in the UK with an average of 202.1mm, surpassing the previous record of 193.4mm registered in February 1990.
By 2070, seasonal average precipitation may rise by up to 35% in winter, according to the “UK Climate Projections: Headline Findings September 2019” produced by the Met Office for the UK government.
While the UK government offers support to households facing high flood risk via Flood Re, companies are excluded from this scheme. Corporations can find a suitable solution in parametric insurance.
The benefits of parametric insurance
Unlike traditional insurance policies, parametric insurance products do not require loss adjustment after an event because it automatically pays out if a pre-agreed trigger depth has been breached. This is one of the reasons why premium for this type of product is likely to be more affordable.
Parametric insurance policies work in a similar way as catastrophe bonds but they have made this type of cover available to companies of all sizes. Parametric flood insurance policies use a sensor attached outside the building to collect flood data. When the pre-agreed flood depth is reached, the full insured amount is automatically paid out and the insured can determine themselves how to best spend it.
Businesses can select the trigger depth and payout amounts when purchasing the product, giving them a lot of flexibility in how to design their protection.
Companies can reduce premium volumes by selecting a higher trigger depth. If flood barriers protect premises from a 50cm flood, the business can choose a 50cm trigger depth. This higher trigger depth will give the company a lower premium than a 20 cm trigger. New flood defence mechanisms can for example use the pressure of oncoming water to stabilize themselves. While more expensive than sandbags they are lighter, reusable and do not require filler material that will be contaminated after use.
Some companies become quite creative to lower their insurance cost, for example by moving all assets in their premises above the ground to increase their trigger depth and reduce premium.
Similarly, if a company decides that it needs £100,000 rather than £200,000 to recover after a flood, they can reduce their settlement amount and premium.
In order to offer businesses affordable flood protection, Lockton has partnered with FloodFlash, a registered coverholder at Lloyd’s of London which offers a simple and flexible parametric flood insurance policy.
While FloodFlash provides a solution to a potentially uninsurable risk it can also compliment and run alongside a traditional insurance placement.
For further information, please contact:
Gregg Cordell, Senior Vice President, Real Estate & Construction
Tel.: +44 (0) 20 7933 2268
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