How data advances are opening the parametric gates for flood protection

ICEYE’s Rafal Modrzewski explains how the step change in flood hazard data resolution and availability are helping to position parametric solutions at the forefront of resilience strategies…

Parametric insurance offers huge potential to fill significant gaps in protection against flood risk that traditional insurance products are not able to bridge. Such structures are complementary to indemnity cover but deliver a level of payment simplicity and certainty that cannot be achieved through a traditional insurance program and provide a much more responsive financial support mechanism in the aftermath of a major loss.

Reducing the risk

Parametric solutions require a detailed understanding of the peril and the level of loss that it can create. A trigger mechanism is designed such that when a predefined event occurs, or a certain predefined index threshold is reached, a payment is triggered of a value that is calibrated to relate to the level of loss that it is envisaged will have been suffered in those circumstances.

Because the payment relates to specific circumstances occurring, and not assessment of the actual loss related to an underwritten asset, a parametric contract will always involve a level of basis risk. While basis risk is also present in traditional indemnity insurance contracts, it is a more profound feature of parametric insurance. Minimising that basis risk requires the definition of trigger thresholds that are as closely calibrated as possible to the likely loss.

In the case of flood, the impact of a particular event on different properties can vary significantly within a relatively small geographic area, as different levels of water depth occur across the underlying terrain. Accurate ground level measurement data plays an important role in understanding inundation and enabling the estimation of potential damage and loss, but it is not possible to measure every point of interest at ground level, for every event.

“Growing access to such high-resolution data within much shorter timeframes is a game-changer for the parametric flood insurance arena”

Fortunately, advances in technology and data analytics can help with the measurement challenge. In particular, the combination of satellite imagery with auxiliary information, such as elevation models, ground sensors and river gauges, enables significantly more complete and accurate measurement of the extent and depth of flooding over even the most major events. This provides the potential for huge forward strides in the application of parametric solutions to address the growing frequency and severity of flood events globally.

ICEYE’s constellation of miniaturised synthetic aperture radar (SAR) satellites can generate detailed flood imagery in any conditions – darkness, clouds, smoke – within 24 hours of a flood peak anywhere in the world. When combined with other aerial images and on-the-ground data, it is possible not only to map precisely the extent of the flood, but also to measure water levels around buildings, often with levels of accuracy measured in centimetres.

Growing access to such high-resolution data within much shorter timeframes is a game-changer for parametric flood insurance.

Upping insurance penetration

The appetite for parametric insurance solutions to bolster socioeconomic resilience, particularly for those most vulnerable to the impacts of climate change, is demonstrated by the recent announcement of a risk transfer scheme for urban floods focused on the flood-prone city of Accra in Ghana.

The scheme is a clear example of the power of collaboration, with parties to the project including the United Nations Development Programme, the German government, the Ghana Ministry of Finance and the Insurance Development Forum, with two of its members – Allianz and Swiss Re – spearheading the risk transfer component of the initiative.

The flood initiative is based on a parametric insurance structure. In the event of a large-scale flood event impacting the Accra region, ICEYE will provide high-resolution hazard data on the incident which combines SAR imagery with additional data sources. This will enable those managing the programme to verify both the extent of the flood water and the depth of any inundation to establish whether the trigger threshold has been met or exceeded.

The comprehensive and accurate nature of the ICEYE solution reduces basis risk, ensuring that payouts are both timely and in line with expectations. Importantly, the flood data is also expected to inform response and recovery decisions throughout the region.

Shoring up the flood market

The development of innovative insurance solutions that enable the industry and affected communities to manage flood risk more effectively and guarantee faster payouts in the event of a loss, particularly for those more vulnerable communities, is vital.

The ability of parametric solutions to deliver that innovation has until now been severely restricted by data limitations. Continued advances in technology and data analytics will enable more sophisticated indexes and triggers to be created and help parametric solutions to play an increasingly important part in protecting communities from the threats posed by natural catastrophes and other perils.

Rafal Modrzewski is CEO and co-founder of ICEYE