The tragic flooding in Houston over the past few weeks has been well covered by the global media, as one would expect when the 4th largest city in the United States is submerged under water. Property insurers are obviously concentrating on claims right now, helping their customers through this traumatic time and getting them ready to rebuild their lives. But as the facts and statistics begin to emerge, it is also interesting and instructive to explore how the risk of events like this can be adequately understood for underwriting and accumulation control by insurers.
The Trouble With Houston
Houston is prone to flooding. In the words of Sam Brody, director of Texas A&M University's Center for Beaches and Shores (AP May 28), "It happens fairly frequently," and "Houston is the No. 1 city in America to be injured and die in a flood." The history of flooding goes back as long as the city has been in existence, with the first major flood happening in 1843 — a quick 7 years after the city was founded (AP May 28). The 20th century record includes over 30 significant flood events in the city. The most recent floods don’t even compare to the flood damage caused by tropical storm Allison in 2001.
Having such an economically and socially important city exposed to such significant flooding potential has led to large investments in flood defenses. In addition to levees and other physical water barriers, the city is permeated by bayous and water retention ponds designed to collect and contain water during flooding conditions. One example, the Buffalo Bayou, has been augmented with an investment of $500 million over the past 10 years (AP May 28).
Meanwhile, Houston is one of the country’s fastest growing cities. Development of residential, commercial, and recreation areas has been trying to keep pace with the arrival of more and more people wanting to live and work in the city. Development on a broad scale makes the ground less able to handle rain and flood waters, as square miles of permeable soil is replaced by concrete and flood plains are replaced by property.
Models, of course, exist for Houston’s flooding to help insurers understand and manage the immense risk. Houston is exposed to all three types of flood (fluvial, pluvial, and surge), and a carrier would ideally have access to models for all three types of flood. Even with multiple types of flood model, there is little chance they could be accurate and dependable for the city because of how fast the city changes. The topography doesn’t help either, since Houston is a flat place and flood models in general are weakened without distinct topography to work with.
Lessons to Be Learned
Upon a first glance, this combination of known and frequent flood risk, ever-improving but out-of-date flood defenses, and ever-changing development makes it hard to believe that property in Houston is insurable — how can a carrier understand such a dynamic and real risk of flood? But insurers are compelled to insure property for reasons other than pure profit: In general, they also aim to benefit society through the protection and risk management that enables people and businesses to thrive. The drive to cover what property they can, according to sound actuarial work and a sound understanding of risk, leads insurance companies to write policies in such flood-prone areas. The NFIP is also compelled by regulation to ensure some coverage in such areas.
The best solution for property insurers is to ensure underwriters and risk managers have access to as much relevant information as possible. Multiple flood models, elevation and other geospatial information, claims history, past flood outlines, ground permeability information, and even drainage information could all be used. Houston is a unique and large-enough city that carriers might consider creating analytics specifically for Houston Flood, leveraging as much of the information above, or more. The history of Houston makes it clear that such a specialized analytic would be well used by any carrier underwriting in urban south Texas.
(To explore this further, read my follow up post on how carriers could create a custom analytic for Houston Flood with InsitePro.)