Parametric solutions can help manage severe convective storm risk

Rich Coyle, US commercial director at FloodFlash, looks at how insurers and brokers can best manage severe convective storm (SCS) risk and increase their clients’ resilience to future events.

Hurricanes and their devastating aftermath are the natural catastrophes that hit the headlines, but the cost of SCS can also substantially mount up, and this peril has become an increased focus for the insurance industry in recent years.

SCS are highly localised weather events that typically begin in March. Characterised by heavy rain, strong winds, thunder and lightning, they can in some cases result in tornadoes.

A mounting cost

Aon’s Catastrophe Insights Report 2023 stated that despite the small amount of SCS ranking among the top individual economic losses of 2023, “the peril was responsible for more than $94bn in combined damage”.

Swiss Re pegged insured natural catastrophe losses at $100bn for 2023, with SCS the largest driver of loss, accounting for a record $60bn of the total – a sum more than double the previous 10-year average of $27bn.

The US accounted for the majority of last year’s SCS losses, with states in the Midwest, Mid-Atlantic and the Northeast the most exposed. Last year in the US, there were 18 SCS events that caused insured losses of $1bn or more.

Losses from severe thunderstorms have steadily risen by 7 percent annually over the past 30 years, with 2023 representing an increase of almost 90 percent on the previous five-year average of $32bn.

Europe also experienced higher losses from SCS last year, with Italy alone suffering losses of $3.3bn – a record for natural catastrophe insured losses in that country.

Flash floods pose a significant risk

SCS events happen when hot, moist air rises in the atmosphere and meets cooler air to form thunderclouds. As well as bringing thunder and lighting and strong winds, these storms can lead to downpours that can create flash floods.

Urban areas and drought regions are particularly at risk of flash flooding as the impervious or hard ground stops rainwater from draining away.

There are also areas where people don’t consider themselves at risk of flash floods as they have never experienced flooding. Last year, there were flash floods in California and in Florida, where the flood exposure is usually storm surge from a hurricane.

The protection gap

Flood is the number one uninsured peril in the US – a recent survey carried out by Chubb found that 85 percent of companies mistakenly believe their property insurance covers some, all, or most types of flooding.

Flash floods are one of the most frequent perils of SCS, and they are also the most difficult SCS sub-peril to forecast and model. Businesses can find it difficult to obtain flood insurance because traditional insurers have cut back on their coverage or charge much higher premiums and impose tighter restrictions.

A parametric solution

The parametric flood market has stepped in to offer a solution where businesses have problems getting coverage from traditional providers. Parametric providers, which have not been subjected to the same historic losses as the traditional market, can charge fairer premiums for flood coverage. And the parametric approach is helping to close a protection gap that sees some $70bn in catastrophic flood damage go uninsured each year.

Parametric coverage was once restricted to governments and large corporations. FloodFlash now uses the principles of parametric coverage to protect the mass market by using smart, cloud-based technology and deep data, with pre-agreed payouts for claims triggered by flood sensors.

We use our smart sensors to pay claims far faster than traditional flood providers. The benefits are less stress, faster recoveries, shorter interruption to the business, and lower claim values due to the prevention of long-term mould and damp.

Climate change means the risk of flash flooding will only increase with SCS becoming more frequent as our atmosphere continues to heat up.

But brokers can help their clients to manage this significant and growing risk by educating them about the danger posed by severe convective storms and informing them about some of the alternative risk protection solutions to this peril.