October 29th, 2008

Models Rise to Flooding Challenge

Posted at 6:01 PM ET

Rebecca Cheetham, Managing Director

Flood is among Europe’s primary natural catastrophe risks, but solutions have been in short supply. Most models have not been able to address the complexity of this peril, rendering targeted risk management impossible. Fortunately, the market is advancing. Stochastic flood models are being developed to support carriers’ decision making and improve their use of capital.

Across Europe, the flood peril has grown in financial severity. Regardless of the cause, insured loss potential has climbed as a result of increased property values and continued development in areas of high risk. The desirability—and cost—of waterfront locations necessarily leads to greater exposure. Also, an increase in insurance penetration, especially in Europe’s larger markets, has continued the threat.

For (re)insurers, the rising stakes have been accompanied by improved capabilities. Stochastic models are offering more complete output to support informed risk management decision-making, and digital terrain models, hydrological data, and information on flood defences allows for detailed hazard modelling. When this is combined with building location, structural, and vulnerability data, a clearer picture of both possible and probable insured losses emerges. Instead of considering only historical factors, the latest generation of European flood models addresses the other variables that could push the cost of a disaster event higher, ultimately facilitating a more prudent approach to portfolio and capital management. Guy Carpenter’s flood models, for example, have included these innovative techniques and have been extended to accommodate the analysis of losses across countries and river systems, especially in Central and Eastern Europe.

Today’s European flood models are not flawless. Most weaknesses, though, involve the quality of the data supplied, and carriers can take an active role to improve their models by gathering available, pertinent information on risk location, construction, and claims history.

Educated decisions protect capital. The maturation of European flood models makes better use of available information to enable the effective management and transfer of risk, ultimately safeguarding balance sheets when disaster strikes. Potential insured losses may rise with the flood waters, but carriers can be ready for the impact.
Guy Carpenter & Company, LLC provides this text for general information only. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide.  All such matters should be reviewed with your own qualified advisors in these areas.

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