Underwriting strategies for Flood Re… to cede or not to cede

Hosted in the iconic Lloyd’s Old Library in the heart of the City of London, Ambiental’s business breakfast kicked off bright and early at 8am on Tuesday 8th December. Undeterred by the cold, grey morning, representatives from the insurance industry filled the auditorium, leaving standing room only for the latecomers.

After a hearty breakfast and a much needed caffeine kick, Justin Butler, Ambiental CEO, opened proceedings; welcoming guests, and inviting keynote speakers to the stage. The event, designed to clarify any murky water surrounding the launch of government initiative Flood Re, could not have come at a more opportune moment, as more than 3500 residential properties are feeling the effects of the Cumbrian flooding of the last week.

Taking to the stage first was Michael Wade, Former Crown Representative for Insurance at the Cabinet Office, highlighting the role the Government in implementing Flood Re. With more than 5.2 million homes in the UK at risk of flooding, and a growing incidence of record breaking flood events, the role of the Government and Environment Agency has never been more crucial. The key roles outlined by Michael guarantee the Government identifies the risk and scope of responsibility with regards to domestic flooding, and ensures affordable home insurance is made available to homeowners at risk of flooding. In addition to this, Michael described the Government’s duty to take ‘macro level’ action, including funding flood defence systems, and providing the means for local organisations to take action. As well as additional funding for this fiscal year, the government has recently announced a six-year programme of funding, investing a further £2.3 billion in flood defences until 2021. For more information and to download Michael’s presentation for yourself, click here.

Next on the bill was Aidan Kerr, Director of Operations for Flood Re, urging the gathered industry members to prepare for the initiatives April launch. As sea levels continue to rise, and the frequency and severity of rainstorms increases, the need to adequately mitigate the climbing flood risk grows ever more urgent.

Flood Re is just such mitigation, offering affordable home insurance to some 500,000 highly-at-risk homeowners across the UK. The insurance pool is to be owned and operated by the insurance industry, and regulated by the Government. Aidan explained that customer experience is to remain unchanged, and it is to be the insurers, not Flood Re, who will set premium prices. Additionally, the insurance industry will have the power to decide whether to retain at risk properties, or cede them to the pool. In order to build up the pool, which will have a liability excess of a 1 in 200 year event, Flood Re will collect a levy of £180 million each year from relevant insurers. In return, Flood Re will accept all eligible flood risk, and pay all flood claims directly to the insurer. Aidan rounded off with a warning to insurers that the first levy, due on 1st April 2016, is a mere sixteen weeks away, and pressed the gathered insurers to actively engage with the initiative, and make the most of the services on offer. To learn more about how to prepare for the introduction of Flood Re, click here to download Aidan’s presentation.

Describing them as a recurring phenomenon, Justin Butler suggested extreme flooding events were becoming the ‘new normal’, as he returned to the stage to discuss decision making when it comes to flooding. As each new device and decision-making support tool emerges, we are in an ever better position to truly understand the risk posed by flood events. The advent of the camera-carrying drone for example, has allowed for the collection of visual data immediately after a major flood event, resulting in almost instantaneous flood model validation.

By comparing real-time flood imaging of the Cumbria flood events to predictive models, Ambiental was able to show a good coincidence of data points, validating the model, and showcasing their mapping products. By accurately estimating the depth and extent of flood events, Ambiental is able to help clients reliably predict loss estimates.

As well as discussing the concept of uncertainty, Justin also described other considerations insurers must take in deciding whether or not to cede high-risk premiums to Flood Re. These included looking at the potential of future flooding; decisions around the company’s market share, and whether they are looking to grow, reduce or maintain their share; transaction costs and overheads; and customer retention and loyalty.

Finally, Justin compared the differences between hazard-based approaches to ceding, and average annual loss-based approaches to ceding flood risk, before encouraging insurers to take stock of their flood data and methods of analysis, and determine whether they were fit for purpose. In doing so, insurers can identify information gaps, as well as uncertainties and sensitivities in the data. Justin’s presentation on the different approaches to ceding can be downloaded here.

The final keynote speaker of the morning was Ordnance Survey’s Senior Product Manager, Chris Chambers. OS has been mapping Great Britain since 1791, and in their two hundred years of service, has accumulated data to underpin £100 billion of the British economy. With such a vast collection of detailed data, OS is perfectly situated to aid insurers in property underwriting and risk analysis, address verification, and analysis of ‘big data’, along with a host of additional services.

The drive of Chris’s presentation was to highlight the value of address level data in assessing flood risk, and the move to replace inaccurate, and out-dated postcode level underwriting. With more than 40 million addresses in its system, AddressBase is the most complete, consistent and accurate source of address information in the UK. These products have been used in critical decision-making processes in recent years, and are now available to insurers and reinsurers to accurately determine true flood risk of individual properties. By using address level location data, insurers can gain a deeper understanding of the proportion of properties at risk in a particular area, which may help in deciding which premiums to cede to Flood Re, and which risks to retain in house. To find out how else Ordnance Survey can help your company, download Chris’s presentation here.

The event concluded with a thought provoking question and answer session. Members of the assembled audience posed their comments and questions to the panel of speakers. This generated interesting debate around the specific workings of Flood Re and provided further insight into the challenges and opportunities facing the insurance industry in dealing with flood risk.

On behalf of the staff at Ambiental, and the keynote speakers, we would like to extend our thanks to all who attended the event. For those who were unable to join us, a video of the event will be made available shortly, along with an audio podcast of highlights from the morning.