A Wake-Up Call for Insurers - Chennai Floods, India
April 20, 2016| By Nighat Khan
In November 2015 a beautiful part of southern India, covering the states of Tamil Nadu and Andhra Pradhesh, became the scene of unprecedented flooding that claimed nearly 500 lives and displaced approximately 2 million people. It resulted in the destruction of property, telecommunications and infrastructure and is considered to be the most costly flood of 2015. Current claims estimates for the insurance industry are close to USD $750 million with the general insurance company, National Insurance, having a gross loss of approximately USD $45 million.
The flooding was attributed to the annual monsoon season and poor urban planning. In theory, this level of flooding only occurs once in 100 years; however an analysis by The Union Ministry of Earth Sciences in February 2016 indicated that the floods occurred due to "poor drainage systems and overflow of dam water (at Chembarambakkam Lake), [and] not only because of excessive rains." The Indian government reserved approximately USD $300 million at the time for the revival of the flooded area and received donations from private companies and individuals that raised an additional USD $14 million.
Chennai is home to IT global giants TCS and Infosys as well as major motor companies TVS Motor, Ashok Leyland and Rane Holdings Auto Co. As a result of the floods, all of these companies experienced depreciation of their stock shares.
Since the unprecedented flooding, Google India and the Flood Forecasting Network of India announced the availability of real time public alerts to provide information on river water levels. According to the FM Global Resilience Index 2015, India is ranked 119 out of 130, based on its economic, risk quality and supply chain factors. The aftermath of the floods has also led to the updating of the Climate Resilience Index in Chennai as a way to ensure that more efficient flood defences are implemented within highly vulnerable parts of the city.
As a result of this event, a regional conference entitled "Floods: Relief, Rehabilitation and Reconstruction" was held in mid-January in Chennai to discuss such topics as water management, urban planning, environmental changes, global warming, disaster management and recovery. The conference provided blueprints on possible solutions to ensure better future resilience against such an event. Other flood-prone cities are taking stock, and time will tell if the plans implemented will divert another disaster of such magnitude.
This is a wakeup call to insurers and reinsurers to better understand cumulative risk exposures, and develop an underwriting strategy for flood risks. More research and questions have to be asked to identify the risks on flood maps and especially to understand any limitations and assumptions used when applying tools and models to pricing risks. New building orders within highly concentrated, urbanised cities should be reviewed for flood defences to assess risk management. For more information on on underwriting flood exposure view our Slideshare or give us a call.