Building a profitable European flood portfolio is like walking a tightrope—a tricky balancing act. It is of course important to minimize your risk of significant losses. But while big losses certainly haunt the market—just remember the €1.7 billion claimed in the UK as a result of last December’s floods—being too cautious or overpricing will lead you to miss out on attractive opportunities.
Striking the right balance is no easy task. Flooding is a complex affair, with many factors to consider (such as the likelihood of three consecutive rainstorms causing major inland flooding in the UK in one month). Insurers are understandably wary. But with the right approach—which involves challenging outmoded assumptions, using high quality data, and remembering that floods spill over national borders—the balance can be struck.
The three principles outlined below should always be borne in mind when looking to grow a profitable European flood business.
1. Challenge your assumptions
It’s always difficult to go against the grain and question long-held assumptions. But as Mark Twain said, “It ain’t what you don’t know that gets you into trouble; it’s what you know that just ain’t so.”
For instance, it seems logical to focus on business well away from rivers or flood plains. But the fact is that up to 50 percent of the average annual loss from flooding across Europe is from pluvial (non-river) flooding such as groundwater and flash floods. “Safe bet” properties can easily attract flood losses, quickly turning supposedly “safe” and profitable portfolios into riskier propositions.
And avoiding rivers can also mean missing out on profitable business opportunities. The European Union invests €40 billion annually on flood defenses, mitigation, and compensation against flood events. Effective flood defenses such as these can transform an area from being flood-prone to largely flood-free.
2. Build your business on the latest detailed, comprehensive and high-quality data
So Mark Twain wasn’t completely right—what you don’t know can also get you into trouble. It’s essential to incorporate detailed, up-to-date flood defense data (covering location, structure and effectiveness) into your exposure analysis. Assessing the impact these defenses have on water flow for a specific area or property provides confidence when evaluating risk, and helps price desirable business more competitively.
That said, getting hold of this data can be an arduous task. Doing it yourself means relying on a range of local and national databases. A lot of data is old and inaccurate, and some doesn’t get published at all. European data in particular is patchy compared to that available in the US. This is why 70 percent of RMS’ data in our Europe flood map and models is proprietary—developed using in-house expertise, research, and historical event information.
But just having the data isn’t enough—you need to use that data properly. And that means modeling across a whole range of scenarios. The recent experience of Northern England—where record-breaking levels of rainfall breached newly-installed defenses—showed that when residents believe defenses have made their area largely flood-free, the resulting false sense of security can have catastrophic effects. People can prove less likely to implement contingency measures or invest in flood resiliency for their own properties. The result? Higher claim costs.
3. Floods don’t respect national borders
Did you know that more than 150 rivers in Europe cross national boundaries? In fact, flooding along the Danube affected six countries in 2013—from Germany all the way along to Serbia!
The lesson is simple: even if you only write business for a single European country, don’t rely on country-specific maps from national institutions to calculate your exposure to flood risk. This also applies when writing business in more countries—even if the data is good, without seeing the flood risk along an entire river you can’t be sure whether your portfolio is taking the lion’s share of the risk.
By thinking about the spatial correlation of flood risk across Europe you can avoid large accumulations of risk and diversify your portfolio without substantially increasing capital requirements or reinsurance costs. An accumulation of risk along a stretch of river in one country can be offset by attracting business in a lower risk area along the same river in a different country.
Balancing risk and reward to build a profitable European flood business is always a tricky affair. But these three principles provide a base from which to build a business that not only minimizes risk, but maximizes profit too.