ABSTRACTS 'Extreme Discharges' - CHR-KHR

Modeling series of extreme flood events for (re)insurance
purposes
Jens Mehlhorn,
Hans Feyen
Christoph Oehy
Swiss Reinsurance Company, Zürich
Mythenquai 50/60, P.O. Box 8022, Switzerland
jens.melhorn@swissre.com
Introduction
The assessability of risk is one of the most important principles of insurance. For a long time the risk of flooding
was seen as almost uninsurable since no adequate flood risk assessment models were available. However, in the
last 5-10 years investments from the (re)insurance industry and risk consultants in the development of such
models have been substantially increased. As a result of these efforts now several flood risk assessment tools are
available. The presentation, firstly, provides an overview on the different model types used for flood risk assessment
and, secondly, explains by the means of an example used approaches and factors limiting the development
of such models.
Flood risk assessment in (re)insurance industry
In general all flood risk assessment tools used in (re)insurance comprise of the same four elements. The first
element contains of information about the flood hazard. Where (location) do we have to expect, how often
(probability) a certain inundation water level (intensity)?
The second element describes the susceptibility of insured values to be damaged when they get in contact with
water. So-called vulnerability curves provide mean damage degrees (percent of loss of insured value) in relation
to water levels for different risk types e.g. residential buildings, residential contents, commercial buildings etc…
The distribution (location) of insured values and insurance conditions such as original deductibles or loss limits
are elements number three and four.
It is needless to say that the result of a flood risk modeling exercise is strongly influenced by the weakest point
in the chain of the four elements. In other terms it does not make very much sense to have detailed information
about water levels in the range of centimeters if the resolution of insured values is low.
Based on the used hazard information flood risk assessment models in (re)insurance industry can be classified in
two different types of models. The first group of models bases on zones which describe the flood risk along
rivers. The risk zones depict the probability (e.g. on average once a 100 years) of each location in a country
being flooded. Zone based tools are generally used by primary insurance companies for risk selection and premium
calculation. Additionally, zoning models help to determine the flood exposure of entire portfolios by providing
the proportions of risks located in the different flood risk zones. This information can then be used to
calculate the annual expected loss of an insurance portfolio.
The second group of models calculate flood losses for a series of historic and/or probabilistic events. Their major
objective is to reflect the correlation of larger river systems to have a flood event at the same time. These
types of models are mainly used by reinsurance companies to determine possible aggregated peak losses (EML:
estimated maximum loss or PML: possible maximum loss) of insurance portfolios or large industrial accounts.
EML or PML values enable reinsurers to adequately structure catastrophe reinsurance programs. And in addition,
by the means of the series of calculated expected losses the price of such catastrophe reinsurance programs
can be determined.
The present abstract and the presentation will only focus on the hazard part of the second type of models.
Main feature of probabilistic flood risk models
In reinsurance terms probabilistic models are defined as risk assessment models which comprise of a set of
probabilistic hazard events. A set of probabilistic hazard events consists of a large number of possible events
which could happen in the region under study which are mostly countries up to entire continents. Probabilistic
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