In order for a risk to be insurable, I believe, it must have these qualities:
- The risk must occur randomly. In other words, you can’t possibly predict the timing of the loss.
- Estimates of the frequency and severity of events and losses must be estimable. Confidence of those losses estimates should increase as the number of risks increases.
- There must be enough risk of financial loss to cause pain. If there is no potential for pain, why insure?
- The premium required to cover the risk isn’t exorbinant, or else no one will buy the coverage.
- The premium has to be high enough to cover losses, expenses and cost of capital, or else it’s not worth it to the insurance company.
So is flood risk insurable?
Does it occur randomly? Yes
Can we estimate frequency and severity of events? Yes. Can we estimate losses from those events? Yes.
Does flood loss cause financial and emotional pain? Clearly!
Will a proper technical be too exorbitant? For some, yes. For most it should NOT. (This will be a topic for a future post).
Can an insurer make money by offering flood capacity? Well, if the market will actually support a technical premium, then it would be foolish not to offer the coverage. If you read between the lines, the issue for flood is, can we appropriately estimate the risk and will the market support the premium for that risk. I believe the answer is yes to both. Stay tuned for future posts.