Harvey and Irma: Five Lessons For The Insurance Industry

The insurance industry was hit hard by the losses of Harvey and Irma, which totalled many billions of dollars. Hurricane Harvey alone caused an estimated $125 billion in damages and is now known to be the second costliest hurricane on record since 1900, second only to Hurricane Katrina (Amadeo, 2020).

There are many lessons for the insurance, business and government communities to learn from these devastating events if anything is to change, and below we explore five of the most crucial ones. However, the unfortunate truth is, none of these “lessons” are new. Harvey, Irma, and the damage from each annual hurricane season merely expose the stark truth: the need for a better understanding of flood risk in the US.

1. Flood is the least understood natural peril in the US

Flood is the most prevalent and frequently occurring natural peril in the United States and affects every state in the union. And yet, despite this, it is poorly understood in the US.

The FEMA database, which is the main national source of flood data, is inconsistent, lacks detail and much of it is out of date. Some regions have no data, while others rely on data from the 1960s. What’s more, it lacks detail on flood depth and return periods, which are two hugely important metrics for understanding potential damage from flood.
 
This has unfortunately led to a false sense of security in some high-risk areas and an overstating of risks in others.

2. Long return period events should not be unexpected

The devastation caused by two storms is quick succession was rightly shocking, with return period estimates for Harvey ranging from a 500-year flood event up to a 1000-year flood event. However, this terminology can be misleading – the science and probability behind these labels is actually rather complex. 
 
From August 2015 to August 2016, there were eight 500-year flood events recorded by the US National Weather Service. There were six 1,000-year floods in the US over the five years from 2010 to 2014. In 2015 and 2016, there were at least three each year (Lind, 2017). 
 
In other words, if you dismiss these long return period events as “inconceivable” events, you do so at your peril.

3. Flood is complex

Flood is far more complex than other perils, mainly because of the impact of local terrain features and geography. It's very localized: one property might be flooded while its neighbor remains unharmed, and different flood types interact in different ways. This leads to a perception that flood is too complex and risky for insurers to write.

The complexities of flood were dramatically exposed by Harvey in particular. Prior to the event, much of the insurance market focused on storm surge and river flooding. However, pluvial flood from intense rainfall was a key feature of Harvey and the volume of rain (estimated at tens of billions of gallons) meant flooding was seen in many areas where river and storm surge flooding had never been seen.

4. The insurance gap is real

This perception that flood is too risky to write by insurers is one factor that contributes to the significant protection gap we see today. Too many people are underinsured for flood in the US and this was sadly laid bare by Irma and Harvey, as well as subsequent storms since then. In Harris County, Texas, where Houston is situated — only 80 feet above sea level and in a hurricane zone – as little as 15% of its structures were covered by flood insurance in 2016 and only 28% of homes in "high risk" areas had flood coverage (Timmons, 2017).
 
Nationwide, market penetration hovers at around 50% of properties in 100-year flood plains. Outside of these areas, take-up rates can be even lower, with one study of New York City estimating that fewer than 20% of those flooded in Hurricane Sandy had flood coverage (Kunreuther et al, 2018).

5. Insurers need access to comprehensive flood data

As we've seen, existing data has many limitations, especially for a complex peril like flood. As a result, for insurers to confidently write flood risk and help close the protection gap, they need access to comprehensive, detailed, and nuanced flood maps like JBA's new 5m US Flood Maps.

Developed at property-level resolution, the highest resolution at national-scale on the market for the US, the maps enable greater differentiation of properties at risk to flood, which is especially key in urban areas like Houston. JBA also models all three flood types to ensure an insurer has a comprehensive view of the hazard and that pluvial flooding is no longer overlooked during flood risk assessment. Our specialist team also developed bespoke methods to capture hurricane scenarios in particular, where pluvial, fluvial and storm surge flooding may occur simultaneously and have wider impacts that can be missed if each flood type is viewed in isolation. 

The maps also cover a range of return periods, from 20 years to 1,500 years, to ensure long return period events like Hurricane Harvey can be effectively assessed.

Learning lessons

Through using comprehensive, up-to-date flood data, insurers can capitalize on opportunities in the private flood insurance market, especially in light of continuing uncertainty around the National Flood Insurance Program (NFIP), help close the protection gap, and widen access to flood insurance coverage across the contiguous US. 

Preparation and awareness are key. As with any natural peril, communities and individuals require as much information on flood as they can access, as does the insurance market that serves their needs. Part of that preparation is having a clear, up-to-date, science-based understanding of the underlying risk.
 
If anything is to change in managing the ongoing risk from hurricanes, then the insurance, business and government communities must take heed of these lessons.  

To find out more about how JBA's new US flood maps can help insurers write flood risk more effectively and understand the complexities of flood during hurricane events, fill in the form above or get in touch.