U.S. companies have a new tool to shield their facilities against climate-fueled floods: a swanky insurance product that measures the depth of flood water on specific properties — and pays out claims within hours.
U.K.-based insurance startup FloodFlash Ltd. entered the U.S. market this year with the goal of providing flood insurance to companies who have struggled to find coverage amid intensifying extreme weather events.
The company will offer parametric insurance policies that they say is more accurate and flexible than existing options on the market — and pays out claims within hours or days, rather than weeks or months. That's made possible by sensors installed on buildings that detect water levels and immediately trigger the claims process to help customers get their money right away.
FloodFlash plans to offer policies to commercial businesses in Texas, Florida, Virginia, Louisiana and California for now, but it could expand to residential markets and other states down the line.
“Flooding is becoming more significant” with climate change, Mark Hara, FloodFlash’s CEO of North America, said in an interview. “The vision is to bring flood cover[age] to more people that need it.”
The move comes on the heels of a devastating hurricane season in the United States' Northeast and deadly flooding in California. These are just the latest disasters to underscore the importance of insurance in the recovery process and the reality that many property owners are underinsured or have no coverage at all.
Most companies can — and many already do — obtain flood insurance through private insurers or the National Flood Insurance Program, which offers coverage up to $500,000 that can be used to cover specific damage-related costs.
But FloodFlash sees an opportunity in the fact that large companies often need far more than $500,000 to handle flood events — and stand to benefit from quick payouts that can be used to cover a sprawling set of expenses.
“The NFIP coverage is a great start. But it’s inadequate as a standalone,” Hara said. For that reason, he added, FloodFlash’s goal is to supplement NFIP coverage rather than replace it.
Also significant is that some companies, including small businesses, are unable to access coverage from the NFIP or private insurers. Among the reasons why is that the policies are too expensive or they do not meet NFIP criteria, because, for instance, they did not reconstruct a facility in a flood-safe manner after a previous extreme weather event, Hara said.
Speed, accuracy, flexibility
Parametric insurance differs from standard insurance policies because it is based on the extreme weather event itself — rather than the value of the damage an event causes.
“With a parametric product, you get a flat amount, and it’s based on a measure of the hazard itself,” said Carolyn Kousky, an insurance expert who is the associate vice president for economics and policy with the Environmental Defense Fund.
In FloodFlash’s case, that means their policies, payouts and premiums are structured around how much water actually seeps into a particular property. A company could, for instance, design its policy to payout $2 million in coverage if flooding surpasses a “trigger point” of 12 inches, another $4 million if flooding hits three feet and $4 million more if their building sees five feet of water — bringing the total coverage to $10 million, Hara said.
Companies’ premiums, for their part, are set based on the coverage they request, the building’s exposure to flood risk and the trigger point they’ve set. The higher the coverage and flood risk, the higher the premiums. The trigger points, on the other hand, work the opposite way. If a company sets an 8-inch threshold, their premium would be higher than if they set a 16-inch threshold, because it's more likely the smaller flood will occur than the larger one.
Once the terms have been set and the coverage goes into effect, FloodFlash installs a long plastic tube on the building’s exterior. That tube is designed to detect water, so when flooding occurs, the sensor measures the depth of the water and alerts the customer, the insurance broker and FloodFlash.
“As soon as it detects water, it would initiate the claims process. And then once proof of loss is established, we make a payment,” said Hara. “The dream is to never have a claim, right? But if you do, you want it to happen as quickly as possible and you want it to be accurate.”
The speed of claims depends on the situation at hand. But FloodFlash says the company system broke its own record in November when it paid a client’s full claim in under four hours.
Speed and accuracy aren’t the product's only important features. Also key, Hara said, is that claim payments do not have a limit and can be used to cover any flooding-related expenses — not just damage to the physical building. That could mean using the funds to, for instance, continue paying employees while the facility is undergoing repairs.
Both those qualities distinguish FloodFlash’s product from commercial coverage offered by the NFIP. For one, commercial payouts offered by the NFIP are limited to $500,000. Also, claims from the NFIP only can be used for specific, damage-related purposes.
Without commenting on FloodFlash specifically, Kousky said the main benefits of parametric insurance is that they’re fast and more objective. That's because they’re based on factual measurements of an extreme weather event, rather than an insurance companies’ judgment of damage.
Also notable is that they’re more flexible than standard insurance tools, which protect against property damage but do not generally cover other financial costs that businesses incur post-disaster. Those potential expenses include debris cleanup or the purchase of generators and fuel to continue operations.
That said, there are major downsides if this kind of approach not used alongside other insurance coverage.
“The big con,” Kousky said, “is that the payout is not related to damage. It’s good because you can use it for all of these other things. But that’s also bad if you really need financial protection against your property loss.”
“A bank or a lender is going to want to know that you have full protection against any damage,” she added. “They don't want your building to have $80,000 worth of damage and you just get a $10,000 parametric payout. That’s not going to cut it.”
Reprinted from E&E News with permission from POLITICO, LLC. Copyright 2023. E&E News provides essential news for energy and environment professionals.