Parametric Flood Cover Rolling In
FloodFlash uses sensor-based technology to provide quick payments to businesses when floodwaters reach a pre-agreed depth.
After rave reviews in the U.K., it has its sights set on the U.S. and beyond.
It has always been crucial. The thing now is that we have the technology available to do it. Flood catastrophe models, for example—computer power is at a stage that those models can be run at a resolution that allows you to price flood risk on a building-by-building basis. You need to be analyzing that risk at a much finer resolution to be able to confidently set prices, and you need to be able to confidently set prices to be able to sell cover to these folks.
The other bit on the technology side is the IoT networks that allow us to measure things like flood depth on a building-by-building basis for the first time. All these technological developments, computer power, IoT networks, satellite data, et cetera, mean that we now have the technology to plug these gaps as they continue to get bigger every year.
The reason that parametric insurance addresses these gaps is that it removes so much cost and uncertainty from that process that insurers can write that risk comfortably for the first time. If I’m writing a traditional policy, I not only have to worry about whether the flood is going to happen but also what sort of damage the flood will cause. I’ll need to know where the ingress points are for that building, is there a basement, has the new stock been delivered that day, has it been delayed to the following day—almost infinite data points that I can never know all the answers to. As a traditional insurer, the way I deal with that is by pushing up the price to compensate for that uncertainty.
With parametric insurance, life is much simpler: if this then that—if that depth is hit, then I make the payment. I only have to worry about the probability of flood, not about the damage that it causes. That means I can now charge affordable cover, even in the highest-risk areas for the first time. One thing is that the speed of payout is fantastic. You don’t need to go through the loss adjustment process. There’s a statement from FEMA that says 90% of businesses that don’t reopen their doors within a week of a flood will close their doors permanently within a year. They need this cover.
Munich Re, Hannover Re and other reinsurers that we work with have been fantastic supporters. We really like working with the reinsurers because they understand the profile that these things will have. You’ll have fallow periods of no losses, and then you will have an event and you will have a lot of things at one time. They’re comfortable with that. Why they are particularly comfortable with parametric risk, again, is that they are not exposed to the same unknowns and the same uncertainties as they are with traditional cover.
There are other aspects as well. Parametric cover aligns incentives between the insured and insurer in a way that isn’t possible with traditional cover. If you have a parametric policy where you have a trigger depth that is, say, three feet, because you’re using physical defenses like flood gates to protect your business in the first three feet, as the insurer, I know you’re going to close those gates because you are responsible for those first three feet. It’s almost like a physical deductible.
In the U.K., we have sold everything from a £5,000 (US$6,576) limit to a £5 million (US$6.6 million) limit. Typically, smaller businesses will buy at the smaller end. Some of them who are using it as deductible infill will buy smaller limits. Others are using it as their main cover and will buy larger limits. Absolutely, there is a scale for bigger limits, and that is why we are in the process of launching a product called FloodFlash+. It’s a policy that uses the same FloodFlash technology to provide limits up to $100 million.
The inception of the idea and how Ian [co-founder Ian Bartholomew] and I got into doing this was a parametric policy put together for the New York subway after Hurricane Sandy hit in 2012, and the limits for that were about $200 million. That is the beauty of parametric insurance. Exactly the same principle that works for a mom-and-pop shop can work for the New York subway. You just have to change the number of zeros at the end.
Yes, partly because of the technology, computer power, and the IoT networks, parametric insurance can be done at a useful scale and at a low enough price point for the first time. The second thing is, because of those technology developments, we can now do parametric coverage for flood. It’s very clear to me that flood is where parametric catastrophe insurance takes off.
Already this year we’ve seen more investment into parametric insurance than for every previous year combined if you look at the venture capital raises—and we’ve only just finished February. The technology developments are allowing this formerly niche market to become available to a larger market and solve a real problem.