Water not as well-understood as other perils, more work needed to pinpoint risk

Humans are drawn to water – congregating around it as they do for matters of life, preference and commerce – but it is a peril that routinely causes considerable damage and is not nearly as well-understood as other perils, says one industry expert.

“We have this innate and very intense need to be near water so that we can move our goods efficiently between one place and another,” Desmond Carroll, vice president and geographic information systems specialist for Guy Carpenter Canada, suggested Thursday during a presentation at the Ontario Mutual Insurance Associations’ 2014 Annual Convention in Toronto.

That said, water has “repeatedly and forcefully kicked our butts.”

Why does the insurance industry not know more about flood risk? It is very difficult, and made more difficult by the size of Canada and how much water the country contains, he suggested.

“Slight changes in your understanding of elevation make huge differences in the extent of floodplains,” Carroll told attendees. “And huge differences in the extent of floodplains result in massive uncertainty in losses,” he added.

Caroll said pointed to a chart in an Insurance Bureau of Canada report that shows the proportion of claims associated with wind, water and fire. Water accounts for a far higher proportion, he said, suggesting several factors could be at play: population density near water produces more claims, the industry is better at managing fire, or the influence of climate change.

“It could be any of those things, but there’s no real obvious answer for this split,” Carroll said. As such, it behooves the industry to understand water far better than it does right now and “maybe as well as we understand things like earthquake, things like fire, things like straight-line wind.”

With regard to overland flood, Carroll said information from governments (available through conservation authorities) does not appear to be in good enough shape or timely enough to help enhance that understanding.

“What you actually find when you try to assemble this into a single, homogenous data set is that it’s so incredibly fractured,” he told attendees. “What this fragmentation does is it makes it near impossible to collect a single homogenous data set from the government.”

Even if all the information is collected, though, Carroll suggested it may not be useful because it is “not consistent and in many cases it’s not good.”

Carroll commented that there was some criticism of floodplain mapping in Calgary following the devastating events last year. But he suggested its mapping is “exceptional relative to many of the other provinces and territories.”

Carroll cited a very high-resolution data set, use of very modern techniques and posting information on its website. “There is really not a lot to fault them for when it comes to doing the job of the government to inform people about flood risk.”

Carroll said there are currently a number of tools to help characterize flood risk, such as topographical syncro analysis, single variable models (which do not offer information about loss or distribution of loss), and the Municipal Risk Assessment Tool (MRAT), a promising development, but one that will remain unavailable to insurers for at least five years.

“This stuff is not sufficient for really creating a safe, homeowners’ product. You couldn’t manage a book with this,” Carroll argued.

As for commercial cover, which is currently offered, “I often wonder how some insurance companies are carrying their commercial flood risk without understanding it better,” he added.

Although zonation tools and scenario events can offer some information, Carroll suggested what is really needed is a probabilistic model. These “fit a simulation that follows history, but is able of producing similar events over and over again,” to provide “a good idea of what your risk looks like at the tail,” he noted.

“They produce probable maximum loss so they’re speaking the language of insurance,” Carroll added. “They tell us how much we’re going to lose from a monetary standpoint, they tell us how often it’s going to happen and they give us distributions around the loss.”