Containing Commercial Flood Risks

Flood risks are rising, but many business owners are still unprepared. Whereas homeowners have access to conventional flood insurance, obtaining coverage is challenging for businesses. This does not mean businesses should go without coverage. By leveraging less traditional insurance strategies, brokers can help businesses secure the coverage they need.

Rising Flood Risks in the UK and Beyond

Climate change could bring an increase in floods around the world, including in the UK. Research from the University of Bristol shows that the annual damage caused by flooding could increase by 20% over the next year in the UK. The United Nations Development Programme says sea level rise over the last two decades has meant that 14 million additional people worldwide live in coastal communities with a one-in-20 annual chance of flooding. By the end of the century, 73 million people may be living in such areas.

Severe flooding has already become a reality for some people. Reuters says flooding cost the global economy more than $82 billion in 2021, representing close to one-third of all natural catastrophe losses for the year. The BBC says Storm Henk led to more than 250 flood warnings in England and left thousands of homes without power. As of early January, some properties near the River Severn had already experienced flooding for the fourth time during the 2023/2024 winter.

This is not the first time the UK has experienced severe flooding. The House of Commons Library says the winter of 2015/2016 saw flooding in approximately 16,000 properties in England, although 20,000 more could have flooded if not for existing flood defenses.

Flooding Can Devastate Businesses

When discussing mounting flood exposures, research often focuses on the individuals and families who could lose their homes to rising water levels. However, businesses are also vulnerable to flood damage.

In the aftermath of a flood, businesses face two primary obstacles:

• Property may be destroyed. Floods can destroy buildings as well as the equipment, inventory, and supplies stored within.
• Business operations may have to pause. While dealing with property damage and general flood conditions in the region, businesses may be unable to continue normal operations. Furthermore, they may lose computer systems and physical documents, meaning they won’t have access to the necessary data to resume operations. The resulting impact on revenue may put the business’s recovery in jeopardy.

Insurance Coverage Is Challenging But Not Impossible

Given the potential for severe property damage and business interruption, companies in the UK should consider obtaining flood insurance. However, they may have difficulty securing affordable coverage with sufficient limits, especially if they have elevated risks.

It’s important to note that the Flood Re program won’t help businesses. This joint initiative between the UK government and insurers aims to help UK residents obtain affordable coverage in light of rising risks and premiums. However, the program only provides residential coverage – businesses are ineligible to participate.

This means many businesses are facing rising risks and premiums without the help of a government program to keep costs down. As the threat continues to rise, businesses may need to look beyond conventional insurance programs to secure adequate coverage.

Alternative Flood Insurance Solutions

For many businesses that have struggled to find coverage in the traditional market, self-insurance may seem like the only option.

Businesses that choose to self-insure their own flood risks may simply set aside funds to cover potential flood-related losses. Another, more structured option is to form a captive insurance company. This is a subsidiary company, wholly owned by the parent company or companies that it provides insurance for. As captive owners, the insured businesses can obtain coverage for hard-to-place risks without facing coverage denials or non-renewals. If the business manages risks well, this can be a fiscally-sound option. The Financial Times says insurers are currently calling for lighter regulation to attract captive insurers to London.

However, brokers should also offer another option: parametric insurance.

Conventional insurance pays claims based on actual losses. Parametric insurance takes a different approach by providing payouts based solely on the occurrence of a triggering event, which the policy defines in terms of the severity and location and how it will be measured. When a triggering event occurs, the business promptly receives a claim payout without the insurer needing to calculate actual losses.

Parametric insurance is a flexible coverage option and is especially well suited for hard-to-place natural catastrophe losses. For this reason, interest in parametric insurance has been growing. Swiss Re says the global parametric industry generated $11.7 billion in 2021 and could generate $29.3 billion a year by 2031.

Do you need assistance securing coverage for commercial flood risks for your clients? Costero provides creative solutions for your coverage problems. Contact us.