Flood peril is increasing

Marcus Winter:

Hello, and welcome to Nothing Assumed, a quick talk on topics that keep the reinsurance industry up at night. My name is Marcus Winter, and today it is my pleasure to welcome my colleague, Raghuveer Vinukollu. Raghuveer is the head of Climate Insights and Advisory here at Munich Re US. And together, we want to talk about flood insurance and flood mitigation efforts surrounding this ever-increasing peril. Raghuveer, welcome to our podcast.

Raghuveer Vinukollu:

Thank you, Marcus. Happy to be here.

Marcus Winter:

Raghuveer, tell us why Munich Re is so focused on the peril of flood.

Raghuveer Vinukollu:

That's a very important question, Marcus. Flooding is the most expensive peril in the United States. In fact, a statistic by FEMA says that 99% of the counties in the United States have flooded since 1996.

Marcus Winter:

99%.

Raghuveer Vinukollu:

That's correct. That's a lot of counties and a lot of property owners and properties that have been impacted since '96.

Marcus Winter:

And for our listeners outside the US, who is FEMA?

Raghuveer Vinukollu:

FEMA is the Federal Emergency Management Agency, which is the country's emergency management agency. Now, since you talk about outside the US, let me take a global perspective for this peril. It's $1 trillion in economic losses since 1980 globally, so it shows the impact of this peril. Let me give you some examples back to the United States. There are lots of loss numbers that are staggering, but let me focus on the Hurricane Harvey. The economic damages from Hurricane Harvey were more than $125 billion. And the National Flood Insurance Program, which is the federally backed flood program, reported a loss of around $9 billion.

When I think about this from an inland flood perspective, the 2019 flooding of the Mississippi River, which is of historic proportions, those numbers does not have any impact of the hurricanes. In just inland flooding, that economic losses exceeded $23 billion. And according to Munich Re's estimates, the insured losses did not exceed $200 million. So overall, what we see is that the protection gap in the United States for this peril is significantly high. In fact, less than 5% of the homeowners in the US have flood insurance. Now, our role as a reinsurer is to provide insurance solutions to property owners so that they can be resilient post-disaster. We at Munich Re, we feel and we are strongly confident that flood is an insurable peril.

Marcus Winter:

So Raghuveer, where can consumers obtain flood coverage today?

Raghuveer Vinukollu:

Currently, in the US there is two options. The National Flood Insurance Program, federally backed program, where consumers can buy up to 250,000 of building and 100,000 of contents coverage. The second option would be the private flood market. Where the private market has more broader coverage options, the limits can vary from as low as $10,000, which is our own product, the Munich Re product, to almost replacement value product. Overall, what we see as the private market is growing quite significantly. However, it still accounts for about 5% of the residential flood insurance market.

Marcus Winter:

We see protection gaps in a number of natural catastrophes. I'm very surprised to hear that the flood protection gap is much wider. Why is that the case? Why do we have such a low level of insurance against the flood perils?

Raghuveer Vinukollu:

Sure. That's a very important question, Marcus, and something that the entire industry is focusing on. But let me place those reasons and the framework of risk assessment, education, and communication. That's what is missing. Now, there is a major gap in the understanding of the peril of flood. Currently, the NFIP uses flood zones, which really do not do justice in terms of communicating the risk. So it's really important to know what the real risk is rather than just a binary aspect of whether you're in a zone or outside a zone. The second reason being hazard amnesia, I call it.

Now, people do forget after that flood events can happen and think that, because it hasn't happened in that area, a flooding event cannot happen in the future. So definitely there is a planning aspect that's missing and people forget. And then the third being the climate change. Climate change continues to impact our world. And as the temperatures increase, more areas will get affected. The risk of flooding will continue to rise. So as an industry, we will need to continue to evaluate this risk while also educating and communicating the impact of climate risk to property owners. I do want to quote a recent study in Nature Communications about Hurricane Harvey. It shows that about 30 to 50% of the flooded properties during Hurricane Harvey would not have flooded without climate change.

Marcus Winter:

Those are very interesting statements. Thank you very much. Is there anything that we can do, or can you share some examples what Munich Re really does to combat those issues?

Raghuveer Vinukollu:

Definitely. I think we are in the forefront. We are a market leader. Munich Re offers several flood products. Our own white label product is called the Inland Flood Coverage, where we offer for the low-end, moderate risk flood zones, affordable flood insurance premium as an endorsement to their homeowner's coverage. Premiums are less than $100 for limits ranging from 10 to $50,000. We do provide reinsurance support to our seed partners for whoever is insuring or offering the flood coverage as a standalone, as well as an endorsement option. We support the National Flood Insurance Program. In fact, we have been on the program, the National Flood Reinsurance Program, since inception. And finally, we also partner with the managing general agents that provide policies to property owners. We also support the community-based mitigation efforts. In fact, we did write a white paper on how the impact of flood mitigation at a community level can reduce premiums significantly.

Marcus Winter:

Raghuveer, please tell me more about those community-based mitigation efforts. Why is this type of mitigation efforts so important?

Raghuveer Vinukollu:

When we talk about perils like flood, as we mentioned, the climate change will increase this risk. And property owners and communities will have to address this risk mitigation. Cities and communities have started focusing on these mitigation efforts, like building a flood wall or having levies over their rivers. And also, nature-based solutions like wetlands and levy setbacks also can reduce the risk for flood. These solutions, when integrated into a risk transfer solution, can significantly decrease these premiums. And this is what we showed in our white paper. We in fact showed that premiums can be decreased as much as 55% if risk mitigation is adopted by a community. According to FEMA, every dollar spent on mitigation efforts for flood is about a $7 in savings in terms of a benefit to cost ratio. So that is exactly what we see in these community-based insurance programs that we are working towards.

Marcus Winter:

That's very interesting. Are there also business opportunities for the insurance and reinsurance industries in that?

Raghuveer Vinukollu:

Definitely. We can offer them parametric solutions and other types of community-based programs that are public-private partnerships that can be very tailor-made for these communities based on the risk that the community experiences as well as the risk mitigation efforts that they're doing.

Marcus Winter:

Thank you. Thanks for sharing your insights, Raghuveer, and your passion about flood and flood insurance topics. Here's my last question that I ask all of my guests. If you had a magic wand, what would you change about flood risks?

Raghuveer Vinukollu:

Thank you, Marcus. That is quite an interesting question. And let me start with saying, if I could change anything from a practical industry angle, I would like to see flood coverage be automatically included in every homeowner's policy, with definitely flexible coverage options. As I mentioned, this coverage for flood should include the aspect of risk education, risk mitigation, and risk transfers. That would address the real protection gap that exists. But given the chance, waving the wand to create real magic, I would like to see flood risk mitigation to be considered for significant tax benefits for consumers and the property owners as part of a policy or an act like the Inflation Reduction Act.

Marcus Winter:

Raghuveer, it's been really a pleasure to discuss the current state of the flood risks in the US and all of those efforts surrounding the risks. It's good to know that the industry has the ability to help address some of the factors and is actively involved in that, and that will help to maintain a less volatile property market as well. Thank you for taking the time for sharing your expertise.

Raghuveer Vinukollu:

Thank you for having me, Marcus.

Marcus Winter:

Stay tuned for our next episode where we will examine the economic indicators impacting our industry in 2023. Bye for now, and see you next time on Nothing Assumed.