November 21st, 2012

Flood Risks in Emerging Markets

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice President
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Despite such important model limitations for earthquakes, the lack of modeling solutions for flood risks poses an even greater threat to (re)insurers. As illustrated by FigureĀ 7 below, flood risk is poorly modeled at a global level by the three main modeling companies, particularly in developing countries where flooding is a regular occurrence.

Figure 7

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Although flood risk is well modeled in parts of Western Europe, including the United Kingdom and Germany, it is striking to note that no probabilistic flood model exists for Australia, New Zealand, the Republic of Ireland or the United States. In addition, modeling solutions by AIR, EQECAT and RMS for flood risks in emerging markets are virtually non-existent, suggesting (re)insurers are unprepared for flooding events in these territories. Detailed flood risk assessments in emerging markets will only be possible once probabilistic flood models have been developed.

Carriers’ lack of understanding of catastrophe risks in emerging markets was well illustrated during the Thailand floods in 2011. The Thai floods stress the importance of understanding accumulated risks and improving the availability of exposure data in emerging countries. It also serves as a warning to (re)insurers of the general threat posed by inadequate modeling coverage as they penetrate new markets.

The lack of flood models in emerging markets undoubtedly needs to be addressed if (re)insurers are to control their risk exposures better in these territories. The prospect of more losses from exposures or regions where risks are not adequately understood, and the increasing interconnectivity of events at a global level, has led to calls for improved model coverage in non-peak zones. In the absence of modeling solutions by the three main vendors, insurers should consider licensing models from other companies that develop their own solutions. (1) Moreover, (re)insurers should also utilize other tools such as geospatial systems, mapping software and accumulation products to improve their understanding of asset concentrations.

Note:

1. Guy Carpenter’s Model Development Team specializes in developing natural catastrophe models in areas where no commercial modeling solution exists. The Model Development Team has built a number of flood models for Europe and Asia, and more products are currently in development.

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