Flood an Underestimated Risk

As Costa Rica sends rescue teams to an area hit yesterday by a magnitude 7.6 earthquake, risk modelers have more natural catastrophe data to contend with: flood loss. Flood losses are on a rapid upswing, according to a report issued today by Swiss Re. Affecting an estimated 500 million people worldwide annually, the increase in flood-related claims has been significant, notes Swiss Re’s new report, “Flood - an Underestimated Risk: Inspect, Inform, Insure.”

According to Swiss Re’s data, in the 1970s annual flood-only related claims were $1-2 billion; in 2011, insured flood losses amounted to $15 billion.

The year 2011 saw the highest economic losses due to natural disasters overall on record, chiefly due to the 9.0-magnitude Tohuku earthquake and resulting tsunami-related floods in Japan in March 2011.

“Recent flood events in Thailand, Australia and the Philippines show that floods now rival earthquakes and hurricanes in terms of economic losses,” said the report.

As with any natural catastrophe, frequency and population density are key factors in determining loss. According to AIR Worldwide, Costa Rica’s earthquake, the sixth such damaging earthquake within this seismic area within 30 years, occurred approximately 150 km west of San José , the nation’s capital and largest city (approximate population 365,800 as of 2006). Despite the magnitude of yesterday’s quake, damage may not be significant given the depth of the event, as well as the remote location in which it occurred and the sparse population it impacted, notes AIR.

The initial estimate of the size of the quake prompted the Pacific Tsunami Warning Center to issue a tsunami warning for Pacific coastlines of Costa Rica, Nicaragua and Panama, as well as for Mexico and Chile. The Center later canceled the tsunami-related flood warning.

Although an early review of the event by Costa Rica's National Commission of Risk Prevention and Emergency Attention revealed some structural damage near the epicenter and minor nonstructural damage beyond, the ultimate earthquake-related damage figures are still being determined.

Swiss Re’s report notes that flood losses are also based on population growth, a concentration of assets in exposed areas and climate change all contribute to the increasing costs of flood damage and create challenges for insurability.

Jens Mehlhorn, head of flood at Swiss Re and the report's key author, points to Thailand’s severe flood losses as an example of the unique challenges faced by the insurance industry related to natural catastrophic losses. "The $12 billion insured losses in Thailand really highlighted the potential for flood to cause extreme losses,” he says. “The insured losses corresponded to 1,800 percent of the country's total annual property premium."

Insurers must also manage risk-related issues tied to natural catastrophic losses such as the trickle-down effect of supply chain disruption, a known hazard related to natural catastrophic events such as earthquakes and floods.

In the case of Thailand's recent flooding, Swiss Re’s risk management professionals worked to identify 'hot spots' -clusters of industries relevant to global supply chains located within flood prone regions, says Swiss Re. These areas face extreme losses when claims are triggered by interruptions to international supply-chains. The identification of these hot spots was enabled by Swiss Re's Global Flood Zones model, which provides very high-resolution flood maps for the entire globe.

The Swiss Re report, which instructs insurers in the support of risk-minimization strategies such as flood-walls and urban planning, includes a discussion of national flood insurance programs. In the United States, the Biggert-Waters Flood Insurance Reform Act of 2012, signed into law Friday July 6, 2012 by President Obama, extended the National Flood Insurance Program (NFIP) for five years and makes reforms to the program.

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