Flooding As An Emerging Risk For The Insurance Industry - Justin Butler
Recent flood events have driven flood risk up the political and risk management agenda. Dr Justin Butler, MD of flood risk assessment and modelling consultants Ambiental (www.ambiental.co.uk) looks at the growing issue of flooding in the UK, examining what insurers can do to address the problem
The summer floods in the UK this year are estimated to have cost the insurance industry in excess of £3bn (ABI). These losses are not likely to be a one-off; climate change will lead to an increased probability of floods events of this magnitude occurring again. Climate change is predicted to cause significant changes to rainfall patterns, increasing the probability of high intensity rainfall events. It will also cause rapid sea level rise, which will lead to higher storm surges. Not only will the impact of a flooding increase in current flood risk areas, but much more of the country will be exposed to the flood hazard.
This problem is compounded by the concentration of exposures in high risk areas; low lying areas by rivers and in coastal regions have historically attracted human settlement for a variety of reasons including access to fertile land and transport. Indeed, many major international cities are located next to rivers or within the coastal floodplain (e.g. London, Tokyo and New York). Increasing levels of urbanisation and affluence, as well as the tendency to locate high-value assets such as power stations next to water mean that the number and value of properties in the floodplain are continually on the rise.
In addition, it is not just the risk of flooding to a new development itself that can be problematic. Construction projects in the floodplain are often accompanied by loss of vegetation and reduction in natural flood storage, thereby potentially increasing the risk of flooding in other areas. Therefore it is important for insurers to understand that, irrespective of the potential impacts of climate change, the number and value of properties and assets at risk of flooding are set to increase in the future.
An estimated 10% of all properties in the UK are at risk of flooding, and 185,000 businesses. The Environment Agency estimate that land, property and assets to the value of £200bn are at risk of flooding in the UK. Further to this the government has set a target of 3 million more homes to be built by 2020, and does not want to rule out building these in the floodplain. Whilst the latest planning legislation with respect to flood risk aims to force new development in low risk areas, many developments still get the backing of local authorities despite objections from the Environment Agency.
Insurers need to act immediately to reduce the impact of a large flood event on the insurance industry. Further investment is needed to quantify flood risk, and continued pressure needs to be put on national and local government to prevent development in the floodplain and increase defence spending.
The recent threat of a storm surge in eastern England on November 9th may have sent a shiver down the spine of any insurer. However, high water levels were lower than predicted and the defences in place were successful in holding back the majority of the surge. However much this can be hailed as a success for the Environment Agency and emergency planning authorities, this should be seen as a close call and a sign of things to come if defences are not raised and strengthened.
The design and build of new flood defences can take many years, the Thames Barrier took 8 years to construct, and any new barrier on a larger scale would likely take a lot longer. Most defences are only built as a reaction to a flood event, but with the technologies available today it is possible to predict where is at risk of flooding before an event occurs. It is therefore important to press the government to invest in defences to protect vulnerable areas long before the damage is done.
Development in floodplains is still taking place despite, in many cases, the objection of the Environment Agency. Insurers need to take into account the impact of possible climate change when committing to insure these developments.
Whilst fluvial and tidal and flood risk are well researched, we are increasingly seeing flooding, such as that in Hull this summer, that is caused by overloading of storm drains. The only procedure currently available for assessing possible losses to exposures due to surface water flooding is analysis of historical data. Unfortunately historical records are few and far between, and become increasingly inappropriate due to the impact of climate change on storm events.
Modelling surface water flooding can be an extremely complex process, since rainfall events can be extremely localised, are strongly determined by topography on the very small scale and also depend on the capacity of drains. Putting such complex information into a model not only increases the time that the model takes to run, but also enormously increases the data costs involved. Therefore if insurers want to be able to define all possible sources of flood risk to a site, they will have to be prepared to pay the cost.
However it is not only important to invest in research in development of these new technologies but also in further development of technologies already in use. The current nationwide flood modelling does not taken into the account the variation in flood characteristics of different areas. Whilst the adopted approach may be adequate for rural areas, it is extremely important to recognise that urban areas, where the vast majority of exposures are located, are much more complex to model. Congested urban environments produce highly complex patterns of flooding. As such, urban flood models need to operate at an appropriate spatial scale that accounts for the impacts of buildings, natural features and flood defences so that there is an accurate representation of flow routes that flood waters will take.
At Ambiental we have developed a modelling approach which can account for these factors. FlowrouteTM, is our ultra high-detail, three-dimensional flood risk modelling platform, developed in conjunction with Cambridge University, that can be used to evaluate: i) the impact of existing buildings; ii) new buildings and future development; and, iii) climate change.
FlowrouteTM incorporates high detail topographic information at the sub-metre level which includes buildings, structures and flood defences as well as the impact that these have on patterns of flood risk for large urban areas. Simulated water flows for multiple return periods are routed along streets and around buildings. The model provides information including depth, duration and extent of flood risk down to the individual building level – particularly important for insurance underwriting and loss accumulation. Similarly, because of the three-dimensional nature of the underlying topographic information, new buildings and proposed future developments can be incorporated into the model to enable assessment of future patterns of flood risk. Furthermore, the model is based on well-established hydrological and hydraulic principles which can be adapted to incorporate future climate change scenarios such as, increasing sea levels or more intense storms.
Ambiental Flood Risk Assessment
This article was originally published in the January 08 edition of Global Reinsurance.
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