Flood risks on the rise

Each year, floods destroy assets worth billions of dollars. In the last five years alone, losses from flooding worldwide amounted to US$ 320bn, of which roughly US$ 56bn was insured.

The costliest flood-related catastrophe took place in July 2021 in central Europe, when devastating flash floods in western Germany’s Ahr Valley and in adjacent countries caused aggregate losses, adjusted for inflation, of US$ 58bn. It was the most expensive natural disaster in Europe in decades. The insured share of the losses, as is often the case with flood events, was comparatively low (US$ 15bn).

From a long-term perspective, only storms cause greater economic losses worldwide than floods. In most cases, only a small percentage of those losses is insured – and not just in poorer countries.

An example from 2023: In China, massive flooding from Typhoon Doksuri produced aggregate losses of roughly US$ 25bn, of which only US$ 2bn were insured.

The comparatively low share of insured flood losses – even in industrialised countries – is partly due to the limited range of insurance covers in many regions of the world. This is due in part to the fact that there are only limited coverage options in some regions. However, a lack of demand is also a factor – even in flood-prone areas.

In Germany, for example, flood insurance isn’t a fixed component of standard homeowners’ insurance. Accordingly, the density of insurance coverage against floods continues on average to be roughly 50%, despite all efforts to reduce this gap. As a result, a large percentage of the losses from the latest flooding in southern Germany after extremely heavy rainfall in early June will remain uninsured.

In addition, many losses involve public infrastructure (such as roads, railways, dykes and bridges) that is generally uninsured.

Climate change is increasing the probability of extreme precipitation in many regions of the world. More frequent flash flooding and flood disasters are the consequence. Rising temperatures in the atmosphere and warming sea surfaces are also influencing precipitation patterns. Since warmer air can absorb more moisture, this increases the potential for heavy rainfall. Numerous scientific studies analysed by the Intergovernmental Panel on Climate Change (IPCC) indicate a likely rise in flash floods and river floods in many regions of the world.

Scientists have also analysed the catastrophic flooding in Europe, which especially affected Germany in July 2021. They concluded that climate change was at least a contributing factor to what is commonly referred to as the Ahr Valley Flood. The latest catastrophic flooding, in southern Germany this June, followed a similar pattern.

The same conclusion was reached for the flooding disaster in Pakistan in 2022 following severe monsoon rains, with estimated losses of at least US$ 15bn – an enormous amount given the size of the country’s GDP. Researchers estimate that, as a result of climate change, the intensity of this event has increased by half compared to a world without global warming, and believe that it will continue to rise in the future.

Yet flooding is regarded as the natural hazard against which precautionary measures are most effective. In Europe, for instance, the overall trend in losses (after adjustment for increases in values) has fallen – despite repeated severe river floods, such as those in 2002 and 2013. In other regions, too, there are indications that protective measures have reduced adjusted losses.