Made to Measure
Only 20% of the world’s $70 billion in annual flood losses are insured.
In recent years, parametric insurance has been shown to address policyholders’ most pressing needs immediately after a flood. Taking advantage of the emergence of several new technologies, it has fast become an important solution to the global flood underinsurance problem, offering greater resilience at a fair price. Parametric insurance is a type of insurance that pays out based on the occurrence of specific predetermined events or conditions rather than the actual financial loss incurred by the policyholder. Simply put, if a measurable event happens, the policy pays out. It is typically used to cover natural disasters such as floods, earthquakes and hurricanes.
Accurate measurements play a fundamental role in parametric insurance because they determine when a policyholder gets paid. Insurers need a robust system in place to collect, process and validate measurements in a timely manner.
A good parametric trigger measurement for flood insurance needs several key features to ensure accurate and reliable data.
- Related to loss < A parametric trigger should provide a good proxy for the costs of loss caused by an event. The trigger should be related as closely as possible to the loss in order to minimize basis risk.
- Accuracy and resolution < The measurement that triggers coverage needs to be accurate enough to determine reliably whether a threshold has been met. We must guarantee that the measurement can be made relatively easily and that the likelihood of a missing measurement is very low. In particular, this means that the method of measurement should be resilient enough not to be impacted by an event itself.
- Transparency < Trust is an important part of an insurance contract. The nature of parametric claims makes for a more transparent claims process provided the customer can easily interpret the trigger.
- Cost-effectiveness < The cost of taking measurements and processing the data for the lifetime of a contract must be affordable.
- Speed < Making payments quickly in the aftermath of a disaster is a key benefit of parametric insurance and a great predictor of financial recovery. We need measurements that can be taken and delivered in near-real time.
Depth Of Water as a Proxy for Loss
In parametric flood insurance, depth of water is used widely as a trigger measurement because, typically, it scales positively with loss (i.e., a building that is submerged under several feet of water is likely to have sustained more damage than a building that is only partially flooded). In a few applications, such as agriculture or larger-scale governmental projects, the total area flooded or number of buildings affected might also provide a good proxy.
Depth-damage curves which relate the depth of water at any given property to the level of cost have been developed using large data sets from historical flood events (e.g., Army Corps of Engineers). They are deployed in engineering-based risk assessments as well as catastrophe models that have become widely adopted within the insurance industry.
The relationship between depth and damage will be specific to a particular building, both due to its construction and the value of any contents. Other factors such as water quality, duration of flooding, and the velocity of flowing water can also influence the amount of damage, although for any location their scale and impact are likely to be related to the depth of flooding that happens.
How to Measure: Assessing Available Technologies
The choice of technology used to measure a parametric flood trigger comes down to the specific application and its ability to fulfill the six criteria outlined above. When we started FloodFlash, solutions typically fell into one of two categories: satellites and river or tide gauges.
While it makes sense to use satellite technology for area-based parametric insurance, even the most advanced technology has limitations. Satellites give a snapshot of flooding over a wide area, but the approach compromises on both accuracy and frequency of measurements. Like an impressionist painting, satellite data give pictures that look clear at a distance but lack detail and accuracy under closer scrutiny.
To become more accurate, satellite data typically need “ground truthing” to verify any view of a flood. This process relies on independent methods of measuring a flood to calibrate the images from the satellite—often ground-level sensors.
That leads us neatly to river and tidal gauges. Preexisting gauges are often maintained by public agencies, such as the Environment Agency in the United Kingdom or NOAA and USGS in the United States. They provide accurate and high-frequency measurements of river depth or tide levels that are both transparent and reliable. Using these for parametric triggers solves some of the problems posed by the satellite approach but introduces one of its own.
Although gauges can provide measurements that relate closely to loss for neighboring locations, basis risk emerges very quickly as the distance between the insured property and the gauge increases. Existing gauges have usually been established to serve another purpose and would always be within an existing water body. The cost and maintenance required for an individual gauge is too high to be justified in the context of anything but the largest insurance contracts and would anyway still be somewhat removed from the insured location.
Capitalizing on the Internet of Things
We needed to combine the satellite’s ability to provide data about flooding at any location with the accuracy and reliability of measurements from river and tidal gauges. In response, we developed a low-cost water-depth sensor which can be attached to the wall of any building or structure at ground level. Designed to capture high-resolution measurements of water depth at very high frequency during a flood, this small, battery powered device can be placed in any areas that might be at risk of flooding.
The sensor uses ultrasonic technology to provide millimeter accurate water level measurements with an extremely high sampling rate. It measures the return time of an ultrasonic pulse within a tube, which is reflected from the surface of water as it rises. A measurement is taken every five minutes and is processed in real time to account for environmental factors such as air temperature and humidity as well as the speed at which flash flooding can occur.
On-site sensor installation drastically reduces basis risk compared to using river or tidal gauges without compromising on accuracy. The ease of installation means that we can create a network of readings across a country or at a client’s single property, providing the broad picture of a satellite without compromising on reliability. The result is improved accuracy on parametric flood insurance triggers, faster readouts of data, and speed to payment.
Fast access to funds can limit damage by preventing damp and mold while alleviating stress and providing a head start to recovery. More profoundly, studies in the aftermath of Hurricanes Irma and Harvey have shown that a business that can reopen within days of a catastrophe is more likely to survive in the long term and that getting a higher number of businesses reopened is key to the recovery of a community overall. In this way, the sensor is much more than just a depth measurement device, within a parametric insurance policy, it is a lifeline for business survival.