Navigating Uncharted Waters: The Rise of Parametric Flood Insurance

According to an article in Nature Communications, “1.81 billion people (23% of the world population) are directly exposed to 1-in-100-year floods.” Owing to such grim statistics, the insurance industry stands at a juncture. Traditional insurance models have come under pressure as climate change has upended historical weather patterns all over the globe. (The situation in Florida – where many have found it more difficult and expensive to obtain coverage – speaks for itself.) Though not a panacea, parametric flood insurance offers a transparent solution to the problem of hedging against an extreme weather event.   

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Where flood risk is projected to rise fastest in the US

A new analysis projects changes in flood risk between 2020 and 2050 by zooming in on every neighborhood across the U.S.

Why Every Business and Property Owner Should Consider Flood Insurance

The devastating power of floods is undeniable. Indeed, the World Health Organization asserts that they are “the most frequent type of natural disaster.” In the U.S. alone, 41 major flooding events between 1983-2023 have resulted in over $1 billion in damages. A recent article in Scientific American “estimated that the annual cost of flooding today is over US$32 billion nationwide.” For business and property owners in flood-prone regions, insurance is the best way to protect investments against the unpredictable fury of nature.

The necessity of flood insurance for businesses and property owners extends far beyond the obvious risk of physical damage. Here are compelling reasons why the answer to "Do I need flood insurance for my business / property?" is a resounding, "Yes!":

1. Protection Against Financial Loss: Floods can cause substantial damage to property and inventory resulting in major financial losses. FEMA notes that “Just one inch of water can cause up to $25,000 in damage.” 
2. Business Continuity: For businesses, flooding can interrupt operations and lead to income loss. Indeed, in the U.S. it’s estimated that businesses collectively lose millions of days of operation due to flooding. Flood insurance can cover the loss of business income and hasten recovery efforts.
3. Compliance with Lender Requirements: Many lenders require flood insurance for properties in high-risk areas as a condition of their loan agreement.
4. Asset Value Preservation: Flood insurance helps in maintaining the value of your property by ensuring you have the means to repair and restore it in case of damage. Of note, a recent study in Nature Climate Change estimated that “residential properties exposed to flood risk are overvalued by US$121–US$237 billion.”
5. Liability Coverage: It can provide liability coverage in the event someone is injured on your flooded property, a concern particularly relevant for business owners.
6. Coverage for Clean-up Costs: Flood insurance can cover the costs of cleaning up after a flood, including debris removal and sanitization, which can be substantial.
7. Unpredictability of Natural Disasters: With the increasing unpredictability of weather patterns due to climate change, areas that were not previously considered at risk of flooding may now face potential threats. The New York Times reported that an estimated that “14.6 million properties are at risk from what experts call a 100-year flood, far more than the 8.7 million properties shown on federal government flood maps.” 
8. Inadequacy of Government Aid: Reliance on government aid post-disaster can be risky as it may not cover all costs or might not be granted. Flood insurance ensures you have guaranteed coverage.
9. Rapid Recovery: Having flood insurance means quicker recovery and restoration, minimizing downtime and disruption for businesses and homeowners.
10. Protection Against Smaller Floods: Even minor flooding can cause significant damage, and flood insurance protects against all levels of flooding, not just catastrophic events.
11. Affordable Premiums for Lower Risk Areas: For properties in areas with lower flood risk, premiums are often more affordable, making flood insurance a wise precautionary investment.

The Advantages of Parametric Flood Insurance for Agents

For agents aiming to enhance their offerings beyond traditional insurance models, parametric flood insurance provides several key benefits:

1. Predefined Triggers: Operate based on specific conditions like rainfall intensity or water levels.
2. No Post-Event Assessments: Streamline the claims process by eliminating the need for on-site assessments.
3. Save on Overhead Expenses: Reduce costs by eliminating the need for adjusters.
4. Swift and Transparent Payouts: Ensure quick financial relief with clear payout criteria.
5. Comprehensive Safety Net: Offers clients robust protection against the impacts of flooding.

Agents should consider integrating parametric flood insurance into their portfolio to provide a more effective and efficient coverage option for their clients.

Revolutionizing Flood Insurance for the Modern Age

At Arbol, we’re committed to broadening the horizons of parametric weather insurance. Our goal is to provide products that are both user-centric and transparent, which serve a global audience. Along those lines, we’re especially committed to bringing first-class weather risk management solutions to agents working in regions overlooked by conventional insurers.

Central to our offerings is a foundation of unalterable, open, and decentralized climate data, which ensures a transparent lens to the insurance process. By utilizing data that can be publicly verified via an automated smart contract, we support a streamlined process that equally benefits investors and policyholders. 

Curious to learn more? Contact us here.