The Company Working to Make Flood Insurance Climate-Proof

When Storm Eva hit the United Kingdom in 2015, a surge of rain and river water inundated the streets of the small town of Tadcaster in northeastern England. Along with causing the town’s main bridge to partially collapse, water poured into the Tadcaster Medical Centre, the only hospital in the area.

The destruction from this flooding and recovery efforts at the hospital triggered an insurance claim of some £500,000 (over $750,000 at the time), says Tadcaster Medical practice manager Sarah Botherway. This made it exceedingly difficult for the medical center to renew its coverage without an exorbitant premium—at least through a traditional route.

Instead, they eventually found a different kind of coverage: parametric insurance, which enables businesses to agree on future insurance damage payments before a disaster based on a certain proxy—in this case, water rise related to flooding—rather than based on post-disaster assessments.

And when another storm hit in 2022—slamming the hospital with a “wall of water,” Botherway says—Tadcaster Medical Center received an influx of money from their insurance company within a matter of days, without waiting for adjustors to come and evaluate the damage.

“The great thing was, even while the water was in the building, we were getting messages to say ‘your insurance has been triggered’,” she recalls. “I think anyone whose home or business has flooded knows the smell of a flood [and] the feeling of despair that it’s happened again. But it was mitigated by the fact we already knew money was coming.”

Tadcaster Medical Center’s new policy was from a parametric insurance company called FloodFlash. Launched in 2017 in the U.K., the company utilizes a water sensor installed at properties it covers to alert it if flooding occurs. When water reaches a certain level, FloodFlash automatically issues a payout, sometimes in as little as four hours, according to Ian Bartholomew, the company’s co-founder and chief underwriter.

“The faster people get funds and can start recovering, the cheaper their recovery,” he says.

As climate change accelerates, severe floods are becoming increasingly common, research shows. Warmer temperatures are fueling intense hurricanes, while sea-level rise is submerging coastlines, claiming thousands of lives each year and costing an average of $5 billion in flood damages annually in the U.S.

“Disasters are getting exacerbated by climate change, so there’s going to be a lot more damage to cover,” says Josh Horton, a geoengineering researcher at Harvard University. “And people are discovering the relative simplicity of this idea of a parametric insurance policy.”

FloodFlash isn’t the only parametric insurance on the market; a variety of companies specializing in this product have popped up in recent years, including Floodbase and Blink Parametric. And the concept isn’t brand new. Developing nations have been using parametric insurance for decades, primarily to help farmers recoup losses related to extreme droughts. In 2007, countries in the Caribbean and Central America created the Caribbean Catastrophe Risk Insurance Facility, a regional fund to offer parametric insurance coverage to finance initial disaster response for things like earthquakes, tropical cyclones, and excess rainfall. Since its inception, this fund has provided 54 payouts to 16 of its member nations for approximately $245 million, all within 14 days of the disaster.

In the U.S., the parametric insurance market is emerging at a time when many traditional insurance companies are pulling out of climate-vulnerable areas. In Florida, for example, both small and large property-insurance companies (such as Farmers Insurance and Bankers Insurance) have ceased operations following the severe hurricanes and rising tides that have slammed the state in recent years, including Hurricane Ian, which caused roughly $60 billion in insured losses. Floridians can get alternative insurance coverage from the federally run National Flood Insurance Program, but premiums through that framework are expected to shoot up by thousands of dollars a year in flood-risk areas.

The shrinking supply for insurance, combined with rising demand ”typically results in very, very expensive coverage,” says Enrico Biffis, an associate professor of actuarial finance at Imperial College Business School in London.

FloodFlash is one way that some of that demand can be met. Last year, it launched operations in Florida, Virginia, Texas, Louisiana, and California. Right now, FloodFlash and other parametric insurance providers primarily work with businesses, though some traditional home insurers are considering offering hybrid policies, which include parametric elements alongside existing coverage options.

One reason parametric insurers are thriving in markets where traditional companies cannot is that their risk is quantified before a disaster. This gives the insurers an exact idea of how much they will have to payout a claim when it floods, so the company can ensure it has enough capital to avoid going bankrupt when a disaster hits.

“They know, essentially, they’re not going to pay beyond a certain point,” Biffis says. At the same time, the insurance companies are also cutting costs associated with hiring adjusters to spend time assessing damages caused by a disaster. This often makes it possible to offer a lower premium than traditional insurance in these climate-vulnerable areas, he adds.

But parametric insurance is not without its own set of drawbacks. Since payouts are agreed upon before a disaster, there is a chance they will not cover the full extent of damage that a flood or fire actually causes. However, companies like FloodFlash are working to mitigate this risk by assessing potential damages from flooding down to a “millimeter scale,” and precisely measuring them during a disaster using water sensors, Bartholomew says.

Additionally, parametric insurance companies provide cash payouts directly to the business they are insuring, rather than allocating the funds to specific fixes, which can be a good and bad thing, according to Botherway. “You had no ‘Big Brother’ telling you what you could do but equally I’m not someone who’s expert in refurbishing buildings,” she says, adding that the Tadcaster Medical Centre team was worried they may not spend the money in the most effective way. However, this flexibility also enabled them to buy new equipment that is more resilient to water damage, such as water-proof furniture or new electrical sockets, to prepare for future floods.

“The reality is now that you’re not safe in the same way as you would have been 20 years ago,” she says. “And the only reason that is happening is climate change.”