European Flood and Climate Change: Examining the Potential Impact on Insured Losses

The latest scientific research suggests that flooding in Europe could increase substantially over the coming decades due to the effects of climate change. But how does this translate into potential physical damage or losses? In order to help provide robust analytics that are useful to a range of stakeholders, including (re)insurers, mortgage providers, asset managers, and governments, RMS® launched an investigation to understand the implications of climate change on medium- to long-term flood risk. We used Representative Concentration Pathway (RCP) scenarios, which underpin the Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report as a way to explore future greenhouse gas emissions. Our examination covered how flooding and its impact in terms of physical damage and losses will change across Europe.

Earlier this year, RMS released Version 2 of our Europe Inland Flood HD Models that cover 14 countries and include our latest high-definition modeling capabilities. Using the models in combination with preliminary results from our ongoing research on climate change, we found that by the middle of this century, the average annual loss (AAL) from flood for the 14 modeled countries would increase by an estimated 34 to 75 percent (depending on the emissions pathway) if no mitigation strategies are adopted. This change is significantly larger than the modeled climate change impacts to European windstorm risk, where multidecadal variability may exceed the climate change effects under this time horizon.

How did we get these results? We used the latest climate science from the EURO-CORDEX initiative to adjust our reference view of European flood risk. We explored changes in risk for all four RCP emissions scenarios and for a range of time-horizons up to the end of the century.

The modeling methodology and results of our research into flooding and climate change are thoroughly explored in our most recent white paper, Modeling Future European Flood Risk. RMS will continue to review and refine these results as part of our ongoing commitment to analyze the implications of climate change on future risk. The results presented in this blog constitute an interim update on this research and are not a formalized RMS view of risk.

The RMS Industry Exposure Database (IED) was used to represent the insured exposure across the modeled countries of Europe. Although this blog focuses on European insured flood losses, the alternative climate change views of risk developed by RMS can be applied to any exposure in Europe that is at risk from flooding or extreme winds.

Significant Increases in Risk Without Adopting Mitigation Measures

Looking at Figure 1, the red bars show how total insured flood risk across Europe is modeled to evolve due to climate change. These results assume that the underlying exposure will remain constant and no mitigation strategies will be adapted to counteract loss increases caused by climate change.

The projected increases in risk are significant even under mild climate change conditions. Under the mildest climate change emissions scenario, RCP2.6, the AAL is estimated to increase by 35 percent by the year 2050. There is the potential for very significant increases in risk under the highest emissions scenario, RCP8.5, with AAL more than tripling by the end of the century.

RCP8.5 represents the worst-case scenario of accelerating emissions – resulting in global temperature increases of more than four degrees Celsius by 2100 – and assumes no climate change risk reduction measures are implemented. While this can be thought of as the most unfavorable scenario, it is a stark reminder of the potential effects of climate change should it remain unchecked.

The climate change methodology used by RMS extends the latest science on how climate change may affect key hazard variables (for example, daily precipitation) to its downstream implications on physical damage and resulting financial losses to property and business owners, insurers, and investors. A variety of risk metrics and financial structures can be analyzed. As seen Figure 1, average annual and key return period losses are projected to show significant increases in risk. This could pose serious challenges to underwriting and capital management if no adaptation to the physical and/or financial exposure to flood risk is taken. 

The effects of climate change modeled above are for Europe as a whole. However, we can use the same approach to explore how risk will change within different European regions, countries, or lines of business. Figure 2 shows how AAL is projected to change for each of the different countries covered by the RMS Europe Inland Flood HD Models for the year 2050.

The maps show that increases in flood risk are generally more pronounced in central and western Europe than in southeastern Europe. There are particularly notable increases in risk in Germany and France, which represent two of the three largest insured flood exposures in Europe.

Implications for Risk Holders and Decision-Makers 

While climate change impacts on climate perils are an area of active research, there is a shared expectation that flood risk in Europe will increase in the coming decades. This will pose a significant challenge to asset owners, operators, and insurers.

RMS expects that even though flood hazard may increase, other elements of risk will be adapted accordingly. Adaptation through the use of improved fluvial flood defenses will be necessary, particularly in northwestern Europe. In addition to this, exposed assets may be retrofitted through site-specific flood protection measures, and there is likely to be an increased focus on relocating assets to lower risk zones, if possible. Similarly, underwriting practices may need to be re-assessed, with potential impacts on both the insurance industry and policy holders.

RMS High-Definition Models™ can reflect these potential changes and thus help in assessing how adaptation measures may allow for better risk management, and which measures are likely to yield the most cost-effective benefits. Some examples of this are explored further in the new white paper.

Climate change is an extremely active area of research within RMS and we continue to conduct research into not only European flood but also other peril regions. RMS offers consulting services to assist clients in better understanding exposure to physical risks of climate change for a range of climate perils and regions. For more information, please contact your RMS service representative or email sales@rms.com.