Commercial Flood Insurance: A Parametric Response to Flood Risk in the United Kingdom

What is Parametric Flood Insurance?

Parametric flood insurance is a specialized form of coverage that offers businesses and public sector  a unique way to manage their flood risk. Unlike traditional insurance policies, which require time-consuming and often contentious claims processes, parametric flood insurance pays out automatically when specific predefined conditions are met. These conditions, or triggers, are typically based on objective measurements such as river water level, excessive rainfall amounts or convective storms, making the payout process fast and transparent.

Recent & historical events point to the need for parametric flood insurance solutions

Flooding has always played an important role in the UK and Ireland’s histories. As island nations with extensive coastlines, rivers and mountains, both countries are particularly exposed to fluvial, coastal and pluvial floods which cause significant damages and economic loss for communities and businesses. Primary factors enhancing flood risk include population growth and economic development on floodplains, driven by a shortage of land.

For example, the River Thames between Egham and Teddington, constitutes the largest area of undefended, developed floodplain in the UK. Due to the slow rise and fall of the Thames’ water level, surrounding assets can be flooded for days or even weeks. The past century has seen multiple severe floods in this area, including flash flooding in UK in 2023 that brought the city to a standstill. As tube stations flooded, roads were closed, and properties evacuated, aggregate losses were estimated to exceed GBP £467M according to the  Beinsure Post.

UK Climate Change & Parametric Flood Insurance

UK government climate change projections estimate that in winter, the country’s daily average rainfall could increase by approximately 41% by the year 2050. As a consequence, peak river flows could increase by around 50% – impacting the severity and intensity of flooding for communities, businesses & infrastructure. Similarly, the UK government estimates that the economic impact of a major flood event is currently somewhere around GBP £1 billion. However, due to climate change, the expected damages and economic impact of a flood event could double by 2055.

While the UK has Flood Re, a government-sponsored flood reinsurance program for home insurance, companies are excluded from this scheme. With over 300,000 commercial properties estimated at flood risk, corporations within all trade sectors need to find a suitable solution in traditional or parametric insurance to protect themselves from flood.

Historically, the number of private insurers offering flood protection has been limited in the UK, Ireland and elsewhere, but the small private market is growing. This is partly due to recent improvements in modelling and risk analysis, enabling insurers to understand flood risks and loss profiles better. Such improvements in data availability and accuracy are also the prerequisite for the proliferation of parametric flood insurance globally. Nevertheless, traditional insurers continue to face three main obstacles in providing flood insurance:

1. Flood risk is not perfectly understood due to a lack of reliable historical flood data, meaning insurers are unable to price the risk accurately. As more historical flood data becomes available over time, insurers’ risk appetite for flood risk is expected to increase.
2. Another challenge for insurers is adverse risk selection, where a disproportionately high percentage of policies are purchased by insureds with the highest exposure.
3. Finally, some countries (e.g. France, Belgium, Spain) with monopolistic government-backed flood insurance programs do not permit risk-based premiums, preventing the development of a private insurance market covering flood risk.

How parametric flood insurance can help fill the gap left by traditional capacity

Thankfully, newer risk transfer solutions are on the rise such as parametric flood insurance which address some of these challenges and coverage gaps left open by the traditional market.

As flood risk grows and traditional insurance market capacity continues to decrease, parametrics offer corporates risk mitigation options. Parametric flood insurance policies, as offered by Descartes Underwriting, provide an efficient approach to insuring flood risks. Unlike traditional insurance policies, parametric flood insurance products do not require loss adjustment after an event because they automatically pay out if a pre-agreed trigger has been met, such as; river water height, amount of rainfall, windspeed. Immediate pay-out allows the policyholder to recover and rebuild quickly

Descartes Underwriting uses a new generation of data sources to build advanced hydrologic models to better understand client’s flood risks, providing brokers and corporates with precise, customized parametric flood protection.

The wide range of parametric flood insurance cover allows for a variety of protection measures that can be adapted to the individual needs of a company and the public sector. Parametric flood solutions can be used as the first line of defense against flood risk or as an additional layer to complement an indemnity based policy already in place, helping to close the protection gap.

Parametric flood insurance also helps address other flood risk challenges. For example, a parametric solution can adapt to evolving risk in real-time by using river monitoring data, satellite rainfall data & IoT. This provides enhanced risk protection for businesses or public sector clients.

Parametric flood insurance – a risk transfer tool gaining traction for corporate climate resilience

Descartes’ solutions are uniquely designed to address the key pain points of a client’s locations and exposures around the globe. Suppose a company opts for prevention and damage limitation measures, such as flood protection walls. In that case, parametric flood insurance is the only tool that can incorporate such measures into the design of the insurance cover, reducing the cost of the company’s insurance protection.

Given its advantages over the standard indemnity policies, parametric insurance is becoming more commonplace in protecting industries and businesses from catastrophe and weather-related losses. As a result, there has been a significant increase in the number of clients seeking to supplement or even replace the existing risk-transfer program with parametric structures to improve cash flow following a loss event.