Nearly one-third of the world's population is exposed to flood risk, and flood is by far the most frequently occurring natural hazard. It's time for re/insurers to rigorously assess this peril.
Floods have caused more than a third of natural catastrophe-related fatalities since 2011, according to Swiss Re Institute's latest sigma publication. The record-breaking floods from 2021 demonstrate that a wide range of drivers contribute to losses, including wealth accumulation, urbanisation and aging infrastructure, extreme rainfall from tropical cyclones, and climate change effects.
Secondary perils – typically smaller but relatively frequent events such as flood, severe convective storms or wildfires – are increasingly driving losses from natural disasters. Traditionally, secondary perils have been less well monitored than primary perils, like earthquakes or tropical cyclones. We explore flood, a complex risk worth primary peril attention, in five charts.
1. Record-breaking floods in 2021
Economic losses from large floods – excluding those caused by tropical cyclones – totalled USD 82 billion in 2021, among the highest of all perils. Only a quarter, USD 20 billion, were covered by insurance. Globally, there were more than 50 severe floods and an increase in urban flash floods. The floods claimed more than 2 300 victims, the second deadliest peril after earthquakes.
Europe had the highest losses both for economic and insured flood-related losses in 2021.The July floods in Germany and neighbouring countries generated economic losses of USD 41 billion and insured losses of USD 13 billion – marking the costliest flood event of 2021 and the costliest natural disaster on record in Germany and Europe. This disaster pushed full-year economic losses from floods in Europe well above its roughly USD 10 billion average of the previous 10 years. In Asia and North America, flood-related economic losses in 2021 were in line with their respective 10-year averages.
Historically, Asia has the highest flood-related economic losses. Last year, 20 severe floods occurred in Asia, the highest number of any region. Insurance only covered 11% of economic losses, which gives Asia the largest protection gap – the amount of economic losses not covered by insurance – among the regions. In Europe and North America, insurance covered 32% and 36% of economic losses, respectively.
2. More than water and climate at play in determining flood-risk loss drivers
Atmosphere and land processes combined with socio-economic changes determine flood-risk outcomes. There are three loss components: hazard, i.e. the climate and hydrological characteristics of a flood, such as how heavy rainfall doesn't infiltrate in the soil or get absorbed by the urban drainage system and becomes fast runoff; exposure, meaning people, property and other assets in the flood area; and the vulnerability of the exposed elements to the hazards, such as structure quality, but also flood preparedness and emergency response management.
Economic growth, wealth accumulation and urbanisation have driven the upward trend in flood losses over the decades. Today an entire ecosystem of adaptation and mitigation strategies is available to better manage water resources and emergency response. But the adoption of these risk reduction measures varies greatly.
Even with risk reduction efforts, residual flood risk remains. This is where the re/insurance industry can step in with risk transfer solutions, including private insurance covers and national pool schemes, as well as parametric insurance and insurance-linked securities.
3. Flood has a large protection gap across the world
Since 1991, global cumulative economic losses from major floods were more than USD 1 200 billion. During the same period, only tropical cyclones caused higher economic losses with more than USD 1 500 billion. In third place were earthquakes with around USD 1 100 billion in economic losses, followed by severe convective storms at around USD 600 billion. It needs to be noted that the flood number excludes losses from flooding caused by tropical cyclones, or, in other words, when flood is a secondary effect of a primary peril. If those were counted, the cumulative economic losses would be much higher.
Flood has a large protection gap globally. We estimate that in the last 10 years, only 5% of flood losses in emerging markets were insured, and 34% in advanced economies. For comparison, insurance covered 11% of economic losses caused by tropical cyclones in emerging markets, and 46% in advanced economies.
4. Tropical cyclone-induced flooding is an extra risk
Tropical cyclones are known for the catastrophic damage caused by their wind and wind-driven storm surges. But they can also generate severe inland flooding following heavy rainfall. We estimate that over the past 20 years, losses from tropical cyclone-induced floods would add roughly another 30% to global flood-insured losses.
Five of the 10 largest rainfall events in modern US meteorological history (1949-present) were caused by tropical cyclones. In 2017, Hurricane Harvey, the largest cumulative rainfall event on record, dropped over 30 trillion litres of water within a four-day period. It was the second costliest hurricane in US history for economic losses after Hurricane Katrina. In Japan, Typhoon Hagibis in 2018 caused roughly half of the typhoon's overall USD 8 billion insured losses. In 2017, Cyclone Debbie caused inland flooding in Queensland, Australia, which accounted for about 40-50% of the overall USD 1.5 billion insured losses.
5. Re/insurers should give flood primary-peril status
We believe flood is and will remain insurable. An important task is to deepen understanding of the risk by making more active use of existing technology and models. By optimising the large range of granular data sets available today, and continually updating these as conditions change, existing industry models can be adapted to integrate the multiple factors that shape present-day and future flood risk in different parts of the world. This includes simulating for climate change effects on the water cycle, and the impact of soil-sealing on ground drainage capacity in urban areas – factors that can now be assessed on a quantitative basis.
To this end, we call on the industry to afford flood risk the same attention as primary perils such as hurricane and earthquake when it comes to exposure data capturing, sharing and model use, and to enforce the same discipline and adherence to rigorous risk management practices.