Opinion: Thunderstorms Challenge Insurers to Assess Summer Flood Risk

Is the 2018 heatwave finally coming to an end? It would seem so, with thunderstorms and hail hammering its way across the UK. The weather change acts as a reminder to the insurance industry that to truly asses flood risk you need the whole picture when it comes to property data.

Jonathan Guard, Director of Commercial at LexisNexis Risk Solutions, takes a look at how tech is helping brokers and insurers cope with summer floods.

Jonathan-Guard lexis nexis flood risks

Summer wouldn’t be summer in the UK without the odd downpour but it is also a time of year when too much rain in too short a space of time can cause catastrophic weather event.

It has been 11 years since summer floods cut Tewkesbury off from the outside world. An estimated 7,300 businesses were flooded that June and July[i], when a very dry April was followed by period of sustained wet weather and the wettest start to June for 150 years. Business repairs averaged between £75,000 and £112,000 and there was an estimated £58 million of damage to commercial property[ii].

2018 is also the 50th anniversary of the catastrophic East Devon floods of July 1968. The storm caused immense damage, collapsing bridges, destroying crops, shutting roads, and cutting off access for homes and businesses in the area.

While rain-sodden ground can give rise to flooding, floods can also follow periods of very dry weather, exactly as we are experiencing now.

The parched grass in parks and gardens attest to May 2018 rainfall totals being below average [3], while June was the warmest and driest on record for many parts of the UK[iii]  and this has continued into July.  Dry, compacted ground means that sudden and sustained downpours are less easily absorbed, increasing the likelihood of flooding.

environment-and-flooding gloucestershire risks summer flash

Assessing the risk

Insurance providers face a huge challenge in understanding true flood risks, in order to provide adequate yet affordable cover without significant losses if a large flood event does occur.  However, data enrichment is proving to be a powerful ally in helping the sector to visualise risks, more accurately predict flood losses and determine accurate pricing at point of quote and sale.

We recently spoke to a number of commercial property insurance providers to discover how they use flood and other location data to support their businesses.  Almost all (99%)[iv] use some form of location-based data to enrich quotation and underwriting processes, with flood and fire data used most often.

Furthermore, 64% said their current level of interest in, or need for data enrichment at point of quote is now greater than in the past.  This just goes to show how much the industry is evolving its underwriting processes in response to the varying market forces.

Traditionally the commercial property market used flagged postcodes to assess flood risk, but in recent times have used the location of a property to give a more accurate and granular view of the level of risk.

But still there is scope for a greater level of granularity.  Considering one address in commercial property terms can cover a large area such as a factory covering 1,000 square metres, the flood risk in one part of the property could be entirely different to that in another area of the same property.

So now, it’s becoming possible to deliver precise risk scoring for the entire footprint or outline of a building. We have found that using building footprints as opposed to address location could identify an additional 400,000 properties across the UK that are at potential risk of flooding. This insight is invaluable for property insurance providers.

UK gov devon flooding risks to houses and businesses

Looking back, moving forward

Looking to the future of flood risk prediction and loss mitigation, history has a way of repeating.  Calculating future insurance losses is predicated on claims experience but at this stage, commercial property insurance providers only have their own claims data to rely on.

However, historical flood data is set to change the understanding of risk.  The best way to build a picture of potential flood risk, is to pull together all historical data and map out what happened, the circumstances around the event and whether the same set of conditions could reoccur.  As such, when insurance providers need to visualise and calculate property risk, the analysis for that property will be based not only on the current location and influencing factors, but also on data regarding previous floods, going back more than seven decades.

This creates a ‘worst-case’ scenario, giving property insurance providers the full overview for risk analysis and pricing.

In the future, data on past claims contributed by insurance providers may add a further dimension to flood risk understanding. In our research 67% of commercial property insurance providers said they would value this data along with shared data related to policy history and property information.

Preparing for the worst

While the floods in Tewkesbury and East Devon were extreme and thankfully rare examples, there are always lessons to be learnt from any flood. Unlike those terrible events, early flood alerts can now be used to support customers and reduce losses and more accurate risk assessment using a wider breadth and depth of flood data should assist commercial property insurance providers in pricing more accurately for flood risk.

It is hard to think about flooding when we are experiencing such a fantastic dry spell, but commercial property insurers know from experience that flood events can occur when you least expect them!

Notes:

[i] Pitt, M., 2008. Learning Lessons from the 2007 Floods. Cabinet Office, London

[ii]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/291190/scho1109brja-e-e.pdf

[iii] https://www.metoffice.gov.uk/news/releases/2018/june-end-of-month-stats

[iv] Research Methodology. Using a mix of online panel and telephone interviews data was collected from 77 commercial property insurance professionals, who all answered questions specific to their insurance line. To take part in the survey they had to spend at least 30% of their time in underwriting-related activities. The results showed that the majority of respondents spent over 80% of their time pricing and underwriting policies. LexisNexis was not identified as the sponsor of the study

 

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