Correlation of flood events poses risks

Reinsurers and bigger insurers should invest in ensuring they have a better understanding of the inter-country correlation of flood events as some are unintuitive and have the potential to cause significant losses, Jane Toothill, director of JBA Risk Management, told Baden-Baden Today.

JBA, a flood modelling specialist, has mapped the flood risk in 12 countries: France, Germany, Belgium, Luxembourg, Liechtenstein, Austria, Switzerland, Poland, the Czech Republic, Hungary, Slovakia and Slovenia. In June, JBA released a probabilistic model assessing the correlations between river flooding severity in different river systems in Europe.

Toothill said that a high percentage of severe events affect multiple countries—and thus can mean multiple losses for re/insurers. She said the study found that just 55 percent of flood events hit only one country and the worse the event the more likely it becomes that many countries are hit.

For events resulting in losses with a probability less than one in every 200 years, for example, Toothill said there were no events of this severity where only one country is affected. “The vast majority of one-in-200-year events affect five countries or more,” she said.

She said some correlations are obvious. The river Oder, for example, has Germany on one side and Poland on another, leading to potential flooding in both countries. However, Toothill said, while Poland and Austria are not connected by river systems, the correlation of flood losses between them is high.

These findings are very relevant to reinsurers and bigger insurers with exposures in multiple countries. “They should ensure they have an adequate understanding of correlation of flooding in extreme events to manage their portfolio across Continental Europe,” Toothill said.

She explained that flood modelling is now a very advanced science but that reinsurers have been slow to adopt it and use its full potential. This is partly because it has not always been available to re/insurers in a usable format and in enough detail to be of use.

Thanks to companies such as JBA this is now changing, she said.

“The models are now better and easier to use and the uptake is increasing as a result,” Toothill said. “Severe flooding events such as those in 2002 and 2013 have helped drive realisation that this is important and re/insurers are understating that correlation in particular is something they need to understand.”