With yellow weather warnings in place in early July, and data from the Environment Agency revealing that the UK saw a record 4,858 flood alerts and warnings in the first four months of 2024, it’s little wonder that flooding is on the minds of businesses, individuals and the insurance industry.
For insurance brokers in particular, flood risk presents a significant challenge as they look to provide the right insights and solutions to clients but also an opportunity to showcase the power of specialist advice. Instrumental to providing timely and applicable advice is staying up-to-date with the latest market evolutions – and the innovations that might prove a game-changer for the industry and the clients it serves.
Parametric insurance has risen to the fore in recent years as an example of innovation, with the WEF touting it as a potential climate disaster aid solution in the Global South and Swiss Re’s Public Sector Solutions (PSS) business recently providing payments to 46,000 Indian women during harmful heatwaves.
As defined by Swiss Re, parametric is a form of insurance that covers the probability of a predefined event happening instead of indemnifying actual loss incurred. It consists of a triggering event which engages a pay-out mechanism if the pre-agreed parameter or index threshold is reached or exceeded, regardless of the actual physical loss sustained.
In the context of the insurance industry, parametric solutions bring a range of advantages including increased speed of payouts, clarity around coverage and simplification of administration as they do not require detailed loss assessments.
Parametric also brings a host of slightly more secondary benefits for clients, according to Ciana Kenny (pictured), senior distribution manager at FloodFlash, including increased climate resilience and flexibility in terms of how the payout itself is used. Assessing what’s happening in the market, she noted that policyholders have been facing large excesses from insurers who were previously happy to write full flood cover.
“We’re seeing large excesses, increased premiums and sometimes capped limits, where the insurer is happy to cover maybe £1 million of flood damage, and we’re in conversation to quote for damages above that £1 million mark,” she said. “And, of course, having a solution which can pay out within days of a flood event makes all the difference.”
What has been interesting to see, Kenny said, is the increased conversation about how these payouts can be used as-and-when clients see fit, and to cover the initial business interruption their businesses face after a flood.
At its best, insurance and risk management is about effectively ‘de-risking’ an organisation. A key strength of parametric flood solutions is how closely they line up with existing risk management measures put in place to make a client a better risk, whether that’s flood gates, rain gardens or ‘green roofs’.
It's this flexibility of use which Kenny believes differentiates parametric as an especially exciting insurance innovation. It can be easy to think of parametric as being a one-size-fits-all option, but the reality is it can be incredibly bespoke to a client's specific requirements, and tailored to work alongside and complement the investments they’ve already made with regards to risk management.
The client-centric nature of the way these solutions are designed is a central element of what should make them so attractive to insurance brokers. “We speak with a such wide range of brokers, from high-street brokers dealing with single business owners, right up to the multi-nationals dealing with corporates,” Kenny said. “From that scope, we are seeing that policyholders are now asking for parametric insurance solutions which, for me, shows how this market has started to grow.”
The key challenge for brokers is how to be there to support their clients in an undulating risk and pricing flood risk environment. With insurers now using more sophisticated data and risk models, it’s making it more difficult for brokers to place flood coverage, even in areas that were previously considered low-risk.
Whether through resilience solutions or more innovative methods of risk transfer, brokers are actively looking for new ways to help their clients improve their long-term resilience to flooding, beyond just securing insurance coverage – and parametric is fast emerging as a key tool in that toolkit.
