How can the industry use increasingly sophisticated data to assess flood risk more accurately?
This winter’s storms, high tides and heavy rainfall have resulted in severe flooding across many parts of the UK, with the bill for UK insurers likely to exceed £1bn.
While the insurance industry’s primary focus will be on the clean‑up operation, insurers – especially those bearing a disproportionate share of the losses – will be looking at ways to get a better grip on their flood risk exposure.
For many, data holds the key. Although it won’t stop the water, it will enable insurers to gain a better understanding of their exposure. This allows them to price risk more appropriately, which also benefits policyholders.
“Data is very important in our approach to flood risk,” says Rod Moyse, head of flood mapping and analytics at Aviva. “It gives us a much more detailed understanding of which properties are likely to flood. This enables us to offer more competitive prices – but it also informs our claims team when flooding occurs, so they know which properties will require support.”
While the main focus of data a decade ago was postcodes, its use has become increasingly sophisticated. Insurers now look to a wide range of data sources to help them understand the risk each property presents and build up a comprehensive, personalised risk picture.
“There were only two or three building rates when I started out in insurance,” says David Williams, managing director of underwriting at Axa Insurance. “It’s now limitless, with each property effectively having its own unique rating factor.”
Data can come from a variety of different sources. As an example, Williams points to the fact Axa used to rely heavily on data from the Department for Environment, Food and Rural Affairs and Halcrow for insight into coastal and river flooding, but it now supplements this with more specialist information from firms such as JBA and Ordnance Survey.
Using specialist data from a variety of sources can give more granular detail or inform on the risk of niche problem areas, such as surface water flooding. In addition, an insurer will look to its own claims data to build up a detailed picture of a property’s flood risk.
Williams explains how it all comes together when underwriting property risk: “We use a geocoding system called Mapflow, into which we can feed all the different pieces of data we’ve collected or brought in. This enables us to pinpoint risk to ridiculously accurate specifications and, where a property is in a higher‑risk area, we can spend time looking more closely at it.”
Insurers have undertaken their own data gathering exercises, too. In 2000, Aviva flew a plane over the UK to collect radar readings of every property so it could get a better understanding of each household’s flood risk. This exercise was updated more recently, as Moyse explains: “We’ve updated this information by carrying out the same operation using lidar instead of radar. This enables us to get a much more granular understanding of the height of properties, which can be factored into our flood‑risk assessment.”
For instance, within one postcode there could be five properties that appear to be at risk of river flooding. But by looking at the height of each building, some of these properties may be found to be on slightly higher ground, so would have a reduced risk of flooding. “We are always looking for new sources of information to improve our understanding of the flood risk for both residential and commercial properties,” adds Moyse. “The more we can do to understand the risk, the better.”
As an example, by asking for additional information about the nature of a business – in this case a sports club – Moyse was able to more accurately assess the risk it presented. “The property was well within our comfort zone as far as flood risk was concerned, but when we looked at how it generated income we found this was dependent on its grounds. As these were within a flood plain, it completely altered the risk profile for the business,” he explains.
But data is not the be-all and end-all. Although it can provide a good insight into risk, there can still be some uncertainty, so insurers also rely on the human touch to fully inform them about risk. For instance, at Axa a team of 60 surveyors are available to visit and assess larger risks. “The data might indicate that a risk should be rejected but, where possible, we will make it a referral and send a surveyor to assess it on site,” says Williams. “This would show us the nature of the risk and enable us to provide risk‑management advice where appropriate.”
While the amount of data available to help understand flood risk has increased significantly over the last decade, there are still gaps that mean insurers have to rely on less predictable information for certain types of risk.
Steve Gilbert, personal lines technical underwriting manager at Zurich, says while flooding from rivers and the sea has been relatively well documented, there is less reliable data on surface run‑off. “The effect of surface run‑off, such as from fields, is more problematic. Some datasets do exist but their use and value have yet to be fully explored and verified,” he explains.
Although some information on surface water run‑off is available, the nature of this type of flooding means it can be difficult to produce data that is able to predict risk accurately. For example, although information can be gathered on drainage systems to give an indication of where there could be issues, this would need to be updated regularly to take account of alterations such as new housing developments or changes in the use of farmland that might affect the drains’ effectiveness.
“When you start looking at surface run‑off, you’re dealing with the UK’s Victorian drains,” says Williams. “As well as a [possible] risk of problems due to damage to these old pipes, they were built so long ago that no one really knows what their capacity is. All the focus will be on ensuring the drainage system being put into a new housing development is fit for purpose – without enough attention on how the old infrastructure will cope with it.” All this makes any assessment of the risk less exhaustive.
Future‑proofing flood data
With insurers dealing with an ever‑growing supply of information on flood risk, some are now calling for more consideration of future events. In particular, given the fact that some of the areas currently underwater have never suffered such severe flooding before, many would like to see climate change factored in to help with the predictability of future incidents.
This notion has been supported by the Met Office. Speaking in early February, Met Office chief scientist Dame Julia Slingo said that although there was no definitive answer as to what caused the recent storms, all the evidence suggests a link to climate change. She also called for greater use of climate models to help determine future investments in flood defences.
But factoring in reliable climate change data wouldn’t necessarily be an easy step. “The effects of climate change are notoriously difficult to pin down,” says Gilbert.
“However, any models that offer a possible insight into this are likely to receive increased focus should there be more frequent extreme weather events.”
While climate change data could help with longer‑term predictions, Moyse says there is also more work to be done on weather forecasting. “We are working with academics to get a better understanding of the weather. Being able to produce an accurate long‑range forecast is the Holy Grail,” he says.
But whether insurers focus on fine‑tuning surface water data or gaining a better understanding of climate change, data will become increasingly important when Flood Re is introduced. Under the current agreement, although insurers must continue to cover existing customers, there are no caps on premiums or excesses – so insurers have been able to charge more to reflect the risk.
Under Flood Re, an insurer will be able to cede any properties for which it is unable to provide affordable flood cover into an insurance pool. With this as a potential backstop, understanding which properties are at a higher risk of flooding will be essential.
But although the industry has welcomed this initiative, it is not without its critics. Graeme Trudgill, head of corporate affairs at the British Insurance Brokers’ Association, explains: “Flood Re is great for the 500 000 or so homes that will be covered by it, but we are concerned about some of the properties that are excluded. Some SMEs, which are currently covered under the Statement of Principles, will struggle to find affordable cover under Flood Re. This is a retrograde step.”
As well as SMEs, homes built since 1 January 2009 and those in the highest council tax band in England (and equivalent properties in Scotland, Wales and Northern Ireland) will not be covered.
Additionally, as insurers will be so much more reliant on data, some are questioning whether the information currently available is up to the job. “When you look at some of the areas that flooded this winter, it does make you wonder how accurate the flood data is,” says Williams. “There will be a need for a major review.”
And while there are no indications yet that Flood Re won’t be implemented in summer 2015, given the damage caused by this winter’s floods, further debate about the provision of affordable flood cover is inevitable.
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