High-resolution flood risk modelling is the third wave of disruptive technology to be delivered by the catastrophe modelling industry, according to Robert Muir-Wood, one of the leading lights of the sector.
The chief research officer of cat modelling firm RMS described in a blog how the ‘Class of 1993’ insurers including Partner Re and Renaissance Re were able to establish themselves and price hurricane and earthquake contracts without their own claims history – thanks to the development of cat models.
The second disruption occurred with the development of cat bonds and insurance-linked securities, which gave capital markets investors access to insurance risk. According to Muir-Wood, this would have been impossible without cat loss models.
“Since 2000, catastrophe modelling has delivered a third wave of disruptive technology through flood risk cost data delivered at building resolution,” Muir-Wood wrote.
The availability of big data sets on daily rainfall and river flows, allied with the outputs of climate models and digital terrain data, has enabled this revolution, he noted.
Admitting that it has taken a decade for the technology to be refined, he added: “This ability to measure flood risk cost has opened Pandora’s Box in revealing information that a wide range of agencies, officials and the general public do not really know how to handle.”
The biggest threat comes to government-backed flood insurance schemes, such as the US National Flood Insurance Program, where large and perpetual discounts are given to properties in flood zones.
In the UK, Muir-Wood noted, the technology has already transformed the UK residential flood insurance sector. The ability to model at building-level meant insurers were no longer willing to provide coverage to at-risk properties, requiring government intervention in the form of Flood Re.
“The preconception is that the cost of household insurance should not vary significantly, but should be as consistent as fuel prices, or mortgage rates. The reality is that flood risk costs can vary a hundredfold,” Muir-Wood said.
Homeowners should know about their true flood risk, “or the steps to building resilience and mitigation will simply stall”, he argued.
Muir-Wood said Flood Re was storing up trouble with its plan to eliminate the industry’s cross-subsidy over the next 25 years.
“For properties constructed before 1 January 2009, the Flood Re formula has no incentive to drive flood risk mitigation. Therefore, full risk rating in 2040 may be no more palatable than it was in 2015,” he wrote.