Flood: a sustainable product, built for the future

You don't have to be an astronomy buff to know about Pluto – that maligned and misunderstood planet that was downgraded to "dwarf" status due to its size relative to the other objects in its orbit. Pluto is smaller than our moon, and at about 3.6 billion miles from the sun its remoteness made it hard to see until only recently. In 2015, the New Horizons spacecraft made its historic voyage and sent back extraordinary images. The difference from earlier shots is dramatic! Where you couldn't even be sure you were looking at a planet before, you can now see incredible details on its surface.

A colleague reminded me of the Pluto factor the other day and since then I've been thinking about the parallels between this often-romanticized planet and our understanding of flooding. When we can't "see" a peril clearly enough, it's because we don't have the data we need or we don't have confidence in the data we do have. So, we're reluctant to assign rates that we're not fully confident in – rates that are necessary to fairly compensate policyholders from their losses. That explains why flood has been virtually absent from the private market for 50 years.

The conversation about flood has changed dramatically in the last few years, however, because we have tools that are way more sophisticated than they were even a decade ago. Like the super clear images of Pluto, catastrophe modelers can not only obtain a high-resolution view of flooding in the aggregate, but they can also analyze it at a granular level.

Our just released sigma explains the growing concern around secondary perils, a classification that includes flood. In 2021, insurance picked up the tab for USD 20 billion out of USD 80 billion in flooding losses. That means USD 60 billion losses were uninsured or underinsured, and it's only going to get worse unless we close this protection gap, a gap that's widening as we put more physical assets in vulnerable areas. Aging infrastructure doesn't help, either, and neither does increased rainfall from hurricanes and severe weather.

Where we once relied on rating tables, we can now model flood on a property-by-property basis and price the coverage accordingly. Besides adequate pricing, we reduce opportunities for adverse selection. With risk spread across more residents, it’s not just those with the highest risk that are covered.

Armed with this confidence, more and more insurers are getting into the flood market, and the first adopters who got in a few years ago are seeing their flood portfolios provide returns in line with expectations. And there are other benefits:

• Offering flood coverage as part of a homeowner's policy increases customer loyalty and helps the insurer protect its reputation.
• Flood products and services can be holistically designed to meet the precise needs of customers and markets
• Being able to underwrite flood accurately enables insurers to expand into new territories

When Swiss Re made the decision to offer a private flood solution to our clients, we started at zero. Fast forward to today, and we've written nearly USD 100 million in premium and have multiple deals in the pipeline. Looking back on when we started, I can honestly say it's been worth the effort required as well as patience.

Turning risk into an opportunity may seem like a 180-degree shift, but it's really not that big of a stretch. This is what we do for a living. At Swiss Re, we're combining granular data, state-of-the-art tools and analysis to develop a product on which our clients can build a profitable Property stack.

By offering flood coverage, our clients have the opportunity to capitalize on a growing risk pool with more confidence than ever before. Like the study of Pluto, our understanding of flooding has advanced exponentially in just the last few years and we have a responsibility to use the tools at our disposal to do what's right for society and our clients.