As one of the most frequent and severe natural hazards, flood risk is increasingly challenging to insure – pointing to the need for parametric flood insurance
Parametric flood insurance has been thrust into the spotlight as a result of extreme weather trends and the accelerating pace of natural catastrophes occurring worldwide. Over the past two decades, economic losses from climate-driven disasters have increased by 151%, of which floods account for 43%. Floods, along with droughts, lead to the most severe impact in many critical areas, including agriculture. However, the damage caused by floods is not easy to get covered by traditional insurance products since it is difficult to measure the damage with the existing technology, and an average of more than a year is required to assess the loss.
Causes of floods and the impact of urbanization on flood risks
Floods generally arise from geographical or natural circumstances: vast amounts of precipitation, melting snow and ice, tsunamis from typhoons and earthquakes, etc. However, recent rapid and excessive urbanization, represented by a disproportionately concentrated population, an increasing number of buildings, and soaring energy use, have given rise to the impermeability of water into the ground, which directly leads to the increased number of disasters and worsened damage.
Furthermore, insurers still face challenges regarding technologies, policies, and disproportionate risk selection of the insured, despite the growing market of small private insurers that provide flood protection. As a result, the UK, Australia, and North America have been particularly vulnerable to flood risks and corporates in these countries struggle to find adequate coverage.
The role of parametric flood insurance in covering flood hazard
Parametric flood insurance is a solution to better protect governments, corporates, and communities from flood hazards. Parametric insurance has emerged to fill the gap between growing flood risks and the limits of traditional insurance. Clients are provided with the insurance products modeled and customized to the specific flood risk they are exposed to. Descartes monitors the exposure with our new technologies, and when pre-agreed thresholds, such as river water levels, amount of rainfall, and wind speed are reached or exceeded, it directly leads to pay-out. This, in turn, gives companies in the blind spot instant resilience to flood damage.
