The intensification of flood risks was put under the spotlight last year when Europe was hit by summer floods that cost the lives of about 200 people in Germany alone, in a disaster that has been qualified as the costliest nat cat event ever reported in the region.
Economic losses reached €46bn, of which €11bn were covered by insurance, according to Munich Re. Of that total, €33bn were registered in Germany, where the level of insurance cover amounted to 25%. The numbers show not only the violence of the floods, but also the low penetration of flood insurance even in a wealthy market like Germany.
“There is still a huge protection gap when it comes to flood risk,” says Bernard Reinhardt, a director at Verisk Extreme Event Solutions in Munich. “This is true across the world, but also in developed countries in Europe.”
The protection gap should worry authorities and businesses alike. Even before last year’s disaster, MarshMcLennan reported that the number of flood events reported every year increased by 181% in the two decades after 1980. They caused damage worth more than $1trn, or 40% of all that was attributed to nat cat losses in the period. Moreover, this accelerating trend gives no signs of losing steam. In fact, scientists have warned that climate change is making the problem worse.
The European Insurance and Occupational Pensions Authority (Eiopa) published in May a whitepaper that claims both river and coastal floods will have a stronger impact in Europe’s insurance market in the short term because of climate change. “Global warming, and the consequent increase in the water evaporation and water-holding capacity of the atmosphere, is increasing the likelihood of heavy precipitation and consequently exacerbating flood risk especially in highly urbanised or flood-exposed and low elevation areas,” the authors warn. If other factors such as snowmelt and the level of urbanisation and land use are added to the equation, there are plenty of signs that the severity of floods could increase in the future.
“Not long ago, we would have very cold weather in the winter and many busted-pipes claims. That stopped about ten years ago,” says Mike Hurry, technical manager of private clients and estates at McLarens. “In the past five years, we have seen the kind of monsoon rainfalls that are more characteristic to the Far East, and their intensity has increased.”
In 2021, the German and wider European floods took many observers by surprise. Exceptionally high volumes of rainfall were concentrated in a very short period of time, causing overflows beyond the major rivers, such as the Rhine and the Elbe, that floods usually originate from. The speed with which rivers went up reduced the efficiency of early warning systems, and even houseowners and companies that had plans to mitigate the impact of floods struggled to act in a timely manner. A high volume of debris carried by the flows caused extra damage to properties and the clogging of bridges, some of which were partially destroyed.
“Looking at the flow of the rivers, from tier two or tier three tributaries to the largest river systems, the flow rates for the most affected were quite exceptional, exceeding an estimated return period of several hundred years. For individual affected locations, it was quite an extreme event,” Reinhardt says.
But he adds that its exceptional character does not imply that the event was unique, or that its impact could not have been mitigated. Michael Szönyi, flood resilience programme lead at Zurich, agrees, adding that the floods were surely not unprecedented, as there are reports of other similar events in Germany early in the 20th century. He is also not too happy with the classification of the event as purely a natural disaster.
“It seems to suggest that we cannot do much about it, but there is so much we can do. The technologies are well established,” he says.
The authorities can help by implementing better-thought-out building regulations, so that housing units and industrial premises are not built in areas exposed to floods, or are mandated to equip themselves with technologies that can reduce their impact. Most of the properties at risk, however, were built some time ago, and it is up to their owners to take the adequate measures to face the next disaster.
Insurers have drawn handbooks of measures for businesses that include an extensive list of preparatory actions. They include the identification of nearby rivers, streams or lakes, the protection of below-ground-level premises and moving the most valuable equipment and machinery from lower to upper floors in order to reduce the risk that they will be affected. Roofs and drainage systems must be inspected frequently, the company must be in touch with the authorities that monitor rain intensity or water levels, and a team of contractors must be ready to effectuate repair works right after a flood event takes place.
“We must make sure that no human life is lost, which is really important, and then keep the financial losses down. There is much more that we can do in terms of prevention,” Szönyi says. “If we keep building hospitals with machinery that is worth €1m in the basement in flood zones, it is not a surprise when we see multiple €1m losses in individual properties.”
The effort can be very much worth it. Szönyi tells the tale of a Zurich client in Germany that suffered losses of more than €100m during a flood event back in 2010, but later worked on a range of mitigation actions to be ready for the next time a disaster hit its facilities. Which happened to take place last summer, when the same client suffered no significant losses despite the violence of the floods.
Natural hazard insurance density
There seems to be much work to do in this area, however, as experts noticed that a significant number of high-value insurance claims were filed after the 2021 floods, indicating that many businesses were ill prepared for the event. But another useful development would be to increase the coverage of insurance in Europe.
As of today, it is estimated that natural hazard insurance density in Germany, including flood insurance, stands at about 50% and has not budged for years. In other countries, such as the Czech Republic, Hungary, Poland and Slovakia, flood insurance penetration has been on the rise, but remains low, Eiopa points out in its report.
“A lot of education about flood insurance still needs to be done,” Reinhardt says. “If we look at economic losses, flood has always been a major peril in central Europe. But the takeup of insurance is very low compared to that for wind. That is possibly why it has been not at the forefront of people’s minds in the insurance industry.”
Some countries like Spain, France, Belgium and Romania have managed to spread flood insurance penetration by adding mandatory natural catastrophes fees to property insurance policies. The UK dealt with a lack of capacity by creating Flood Re, a public-private partnership, while several other markets have implemented or are discussing the creation of voluntary or semi-voluntary flood insurance schemes. In Germany, discussion was triggered after last year’s floods about the creation of an opt-out system where flood covers would be made mandatory to property policies, but buyers would have the right to refuse the cover if they wanted to.
But the demand side may not be the only cause of concern in the future. With losses piling up, insurers may become wary of providing cover in the most-affected parts of Europe.
“We have seen more restricted covers, especially for flood risks in Europe in local policies. And we have seen some flood exclusions too,” says Victoria Jewell, head of real estate at McLarens.
Eiopa says flood risks are already usually excluded from policies in the Netherlands, where only some carriers will take river flood risks, while covers against events originated by major dyke failures are harder to find. Companies across the European Economic Area (EEA) surveyed by the regulatory body said they expect an increase in frequency of floods in most European regions, and higher claims payments as a result. Their ability to raise rates accordingly may determine whether flood risk capacity will be available or not for property owners.
According to Eiopa, premiums have already risen due to higher flood risks in Italy, Ireland, Germany, Greece and Cyprus, while underwriting processes have been updated in Belgium, the Czech Republic and Ireland. Reinsurance agreement adjustments are under discussion in Belgium, the Czech Republic, Germany, France, Ireland, Luxembourg and Iceland, while Italian insurers are studying how to incentivise mitigation policies and impose higher deductibles or policy restrictions.
“Insurance companies may decide to raise their risk-based premiums, to counterbalance the increase in flood risk caused by climate change,” Eiopa warns in its whitepaper. The entity estimates that flood risks exposures amount to €11.6trn in the EEA, with France and Germany leading the field, followed at some distance by Poland and the UK.
There are not clear signs that the market will turn its back on flood risks in Europe in the short term, but the worst-case scenario is not hard to imagine. One just has to look at the US state of Florida, where even state-owned insurance schemes have been reluctant to offer capacity to property owners.