High-resolution inputs reduce NYC parametric flood trigger basis risk: ICEYE
Thanks to the use of high-resolution data inputs and observations, the parametric trigger for a newly structured New York City neighbourhood parametric flood insurance pilot comes with reduced basis risk, ICEYE has explained.
ICEYE, a provider of satellite data and services to inform decision-making and analysis, is working alongside reinsurance firm Swiss Re’s Corporate Solutions division and reinsurance broker Guy Carpenter, to deliver a new parametric flood insurance scheme, as we reported yesterday.
The pilot parametric community flood insurance scheme for New York City neighbourhoods will deliver payouts based on a range of data inputs, including ICEYE’s unique satellite insights, as well as on-the-ground real-time sensors, and social media images, all of which ICEYE will compile and report on whether the parametric triggers are breached.
ICEYE explained that it will conduct 24/7 monitoring for potential flood events.
As well as its own satellite imagery from its earth observation constellation, ICEYE will utilise data from New York City’s extensive water sensor network, Flood Net, and also monitor precipitation forecasts, river gauges, and other open-source evidence of developments likely to cause flooding.
When a flood event occurs, ICEYE will continuously monitor and analyse data from the affected areas, after which a comprehensive analysis of the data will be made over a 5-day period before a final analysis is delivered to Swiss Re to define whether a payment will be made to the Center for NYC Neighborhoods (CNYCN), the insured.
Mike Bennett, Strategic Government Account Manager, ICEYE, explained some of the challenges faced in setting up the parametric insurance program, saying, “The densely populated urban environment represented by these neighborhoods generally creates several specific challenges for establishing flood extent and impact. However, ICEYE’s ability to combine our rapid-revisit and high resolution radar satellite imagery with street-level data enables us to deliver an accurate and detailed representation of the flood event in these high-density communities.”
Importantly, the program participants have worked to reduce basis risk in the parametric flood insurance trigger, something ICEYE feels has been achieved through the use of high-resolution data and analysis of it.
Bennett further explained, “To date we have not seen the increase in the use of parametric solutions for flood that we have seen for perils such as hurricane or earthquake. This is primarily due to lack of accurate and comprehensive post-event data for a peril like flood. Reliance on determiners such as excess rainfall or flood modelling can lead to considerable basis risk, thus not doing as much to close the protection gap.
“But by providing high-resolution, accurate, consistent data in a systematic way in near real time, ICEYE helps to significantly reduce the associated basis risk and makes such parametric solutions a much more viable and effective flood resilience mechanism moving forward.”
Andy Read, Global Head of Government Solutions at ICEYE also stated, “This historic program will bring critical financial support to low-income households and help the City respond decisively to flood events. This partnership represents a cornerstone step in the right direction as we seek to address a growing flood protection gap.”
Read also feels the use of more accurate and high-resolution parametric triggers, for insurance programs of this kind, could be appealing to new sources of risk capital as well.
“We believe that scaling these flood programs to the city, state or country level will serve to stimulate increased capital market interest in supporting such ESG-driven initiatives,” Read explained.
“New models of disaster finance are urgently needed as the world has been too slow to adopt strong climate policies, driving up the risk of weather-related extremes,” added Carolyn Kousky, Associate Vice-President for Economics and Policy at Environmental Defense Fund (EDF) and the Principal Investigator on the National Science Foundation grant behind this program.
“Innovation takes collaboration, and ultimately, we achieve more when we work together,” Kousky said.
Using advanced technology, remote sensing, satellite imagery and high-resolution data can all assist in making parametric protection increasingly appealing to insureds, including to sponsors of catastrophe bonds, as greater accuracy and closer calibration of parametric triggers lowers the basis risk and ensures coverage responds precisely when it is most needed.
