Lloyds brings UK flood threat into focus
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Sunday, November 09, 2008
Lloyd’s has added a major UK flood to its set of Realistic Disaster Scenarios (RDS) for 2009.
Imagine record floods along the Thames Valley between Richmond and Oxford. Picture luxury homes under water; the M25 temporarily transformed into a picturesque ox bow lake, plus public transport and businesses grinding to a halt.
Now try and put a figure on the insured losses associated with this entirely plausible event. That’s what Lloyd’s has asked its insurers to do.
Lloyd’s has added a major UK flood to its set of Realistic Disaster Scenarios (RDS) for 2009. Lloyd’s uses RDS to stress test individual syndicates, and the market as a whole, to see how they stand up to chains of accumulated exposure in very extreme cases.
Existing RDS events that Lloyd’s insurers use for stress testing include earthquakes in California or Tokyo, windstorms hitting Florida or the Gulf of Mexico and airlines colliding over large cities.
So why has Lloyd’s introduced a new RDS so close to home?
“We identified several different factors that are converging to create one worrying dynamic,” explains Paul Nunn, head of exposure management at Lloyd’s.
“The most obvious development is climate change, and the scientific consensus that global warming will lead to more extreme rainfall events,” Mr Nunn says.
But at the same time as the exposure and the peril is growing, there is uncertainty around how much longer UK insurers will continue to automatically include flood risk in their property policies.
“Inclusive flood cover could well disappear within the next few years in the UK and that could lead to a big change in the market and the insurers who write it,” Mr Nunn believes.
“Lloyd’s has a robust risk management strategy and these different forces at work ring alarm bells with us,” he says.
The Exposure Management team chose the Thames Valley for its RDS because the threat is quite a realistic one, with the exposed 200sq km area including Oxford, Reading, Slough and Henley. The M4, M25 and M3 motorways are also affected, as is Heathrow airport.
The modeled RDS event results in an overall industry insured loss of £6.2 billion, of which £4.5 billion is residential and £1.6 billion is commercial property.
“Flooding here will give rise to a much larger insurance loss event than anywhere else in the UK,” Mr Nunn explains. “The disruption to Heathrow airport alone will result in material loss accumulations.”
In the RDS, underwriters will also be expected to consider possible losses related to pollution (seepage), event cancellation and, importantly, business interruption.
The new RDS will make Lloyd’s syndicates analyse their exposure to UK flood in the same way as they already do with windstorm and other catastrophes. “Careful management of all kinds of catastrophe risk is a business imperative at Lloyd’s,” Mr Nunn says. “And this latest RDS will draw the market’s attention to a less well understood, but serious exposure.”
As well as the RDS, Lloyd’s, in conjunction with Infoterra, has also launched a new flood risk assessment service for its managing agents, which allows them to gain a better understanding of the flood risks their property portfolios face.
“Managing Agents will now be able to upload their insured property portfolio via a web service, which will then be compared to Ordnance Survey data, matched to address data and a flood risk rating assigned,” Mr Nunn said. “The results will be presented in Google Earth so that they can literally see where their flood risks are.”
The rating will give Managing Agents immediate answers to key business questions such as: ‘what’s our total exposure in specific geographical areas?’, as well as rapid feedback on the flood risk associated with new quotations.