Tackling Flood Risk: Expert Insights to Protect Your Future
From biblical times to today, flood risk has been a recurring global problem, projected to surge due to the onset of climate change. Insurers are often called on to resolve post-flooding complexities, such as compensation, servicing, and remediation, but flood mapping and weather modeling technologies can help turn flood planning into flood prevention. Special guest Dr. Andrew Smith, COO & Co-Founder of Fathom, a climate risk intelligence firm recently acquired by Swiss Re, joins host Graham Gordon, Sapiens’ Director of Product Strategy, to discuss the challenge of flood risk and its broader impact on communities and economies in our latest podcast.
Graham Gordon|Dr. Andrew Smith
Graham Gordon: Hello! Welcome to the Sapiens Insurance 360 podcast. I’m your host, Graham Gordon, Director of Product Strategy at Sapiens, and I’m so glad that you’re out there listening; this is where we discuss the latest news, trends, and issues from across the insurance solutions and technology spectrum.
I think everyone in the industry is all too familiar with the perils of flood risk. Flood risk has been around well, since the time of the original flood or Noah, for those with a Sunday school background. And today’s insurers must deal with the complexity of the aftermath, both financially and servicing and rebuilding. This episode delves into the complexities of flood risk, examining its status as a secondary peril, the implications of climate change on future flood mapping, and the broader impact on local communities and economies. To discuss this and more on today’s podcast is Dr. Andrew Smith, COO of flood and climate risk intelligence firm Fathom. Andrew co-founded the company in 2013 while working on his PhD at the University of Bristol, and more recently, in December 2023, the firm became part of Swiss Re, which is a great fit for the technology if you think about it. So, Andrew, welcome. Great to have you here!
Andrew Smith: Thanks, Graham, great to be here!
Graham Gordon: So first things’ first, it’s not that often we got to speak with the founder of a business. Do you want to give us a quick background of how and why you came to find your company?
Andrew Smith: Yeah, sure. So, I actually undertook a PhD, what is now many years ago. So around, 14 or 15 years ago, I started a PhD, in computational flood modeling. I did it because I thought it was interesting. Nothing, nothing more to it than that. But it transpired quite quickly that, like, the kind of science that we were doing was actually really useful, particularly for insurance companies. So insurance companies were identifying the fact that they really didn’t understand flood risk for the vast majority of the world. And that was brought into sharp focus during the 2011 floods in Thailand. There was, a there was a very big flood event in 2011. Many listeners may remember it and it caused enormous insured and economic damages and losses, in Southeast Asia. And it was a so-called unmodeled loss. So nobody saw it coming, is what, that shortfall. And it was really that, that kind of, I guess, spurred the idea to try and do something commercially. We realized that we were building models that could identify that risk. We could see it in our models, and we just simply thought, well, and maybe it was that naivete of youth, and everything that goes with that. We just thought, why don’t we try and build some risk models and sell them to insurance companies? And that was the, I guess, the, the genesis or the spark for the company. And, it’s been a long journey since then. But that was really the beginnings of it.
Graham Gordon: Makes sense. So look, we’re recording this, in a week where, you know, Central Europe’s experienced a devastating flooding. And I think the 1997, closer to home, the region experienced a 1-in-1,000-year event. And here we are 27 years later, and we seem to have that second-scale event in a thousand years. We have another 970-odd years to go. I thought so obviously with the region. But, you know, it’s acknowledged that the frequency of floods [is] increasing. So what are your thoughts about, you know, flood being viewed as a secondary peril?
Andrew Smith: On the kind of concept of flood being a secondary peril, I think that’s clearly not true anymore. And actually, I don’t think it’s ever really been true. But we can, we can pull numbers to back up why I don’t think it’s true anymore. And you look at insured losses increasing. There’s, there’s been a 30% increase in insured losses over the past decade, and that caused $1.2 trillion in economic losses over the past 30 years. So it’s a huge exposure and loss driver. I think one of the stats that really astounds me is, is that we think around one-third of the world’s population is exposed in some way to flooding. So one-third of the humans on this planet are exposed to flooding in some way. And again, I think that is frankly quite astounding. So calling flood a secondary peril is simply not true. And, I said, at the beginning of my answer that I’m not sure it’s ever been true. And the reason I’m not sure it’s ever been true is that flood losses were historically always clashed with tropical cyclone losses. So you would call, getting wet during a tropical cyclone loss and not a flood loss. And that’s clearly not true. So I always found it perplexing. And, and that kind of confusion undoubtedly led to flood losses being underestimated. But, that’s the long answer. The short answer is, it’s not a secondary peril.
Graham Gordon: And frames that kind of thinking in your mind, isn’t it? If you call something a secondary peril, you think of it as something secondary in your mind. So I guess we’re all familiar with the subject of climate change and how it’s going to affect the nature of future flooding. So what does that kind of mean for you as you look as, you know, mapping the future flood risk?
Andrew Smith: Well, I mean, on, on climate change, it’s probably worthwhile just saying a few words, on why we think climate change will or change flood risk around the world. And that really fundamentally, if we break it down to basic physics, we have some very good reasons to believe that a warmer world will be a wetter world. Essentially with regards to rainfall. Warmer air holds more water. So, I mean, regardless of, of what is driving those changes, the atmosphere is warming. We’re measuring it. It’s warming and warmer air can hold more water. And therefore, we think that there will be more moisture in the atmosphere and that will drive changes in rainfall events and make them more extreme. And we’re seeing that, we’re seeing that scaling. That relationship itself is called the Clausius Clayburn law. And it governs that warmer air holds more water. And we’re seeing that that’s resulting in more extreme rainfall. Secondly, we’re seeing that the ice caps are melting. So [in] a warmer and warmer world, the ice caps get smaller. And that just raises sea levels globally. And that will undoubtedly continue. That’s already, for want of a better phrase, baked in. So we’re going to see coastal flood risks increasing, for sure. But the real difficulty comes in trying to actually quantify and map those changes. So how do we begin to, I guess, measure those changes or model what those changes might look like? Now, to do that, we have to couple flood models. So existing flood models, models that simulate risk today. We have to couple those models which themselves are incredibly complex and uncertain. And we have to, to merge them with an ensemble of climate models. And the climate models attempt to simulate what future Earth’s climate will look like. And that is an incredibly complex and difficult thing to do and results in and frankly, some, some pretty huge uncertainties. We can better quantify changes in sea level that there’s more, there’s more certainty with regards to, changes in sea level, but more uncertainty with regards to future extreme rainfall. And the reality is, is that those uncertainties are often so large that they can make decision-making processes very difficult, because that ensemble of climate models can tell you that there will be both increases and decreases in some regions for some perils. So it’s, it can be a very difficult thing to try and try and model, but fundamentally that’s how we do it. We take existing models and we try and force them with an ensemble of climate models, in a number of different ways. Now, one thing I often like to stress is that regardless of the complexities in doing that, account of a climate change, I think is a useful exercise. And the reason for that is that fundamentally, it’s an exercise in exploring uncertainty. Right? What you’re doing is you’re exploring the uncertainty in the driving mechanism of your risk model. And unfortunately, there’s already a huge amount of uncertainty in trying to define extreme events today. If there’s anybody listening who thinks that, if only the climate was stationary, if the climate was stationary, we’d have a really good understanding of what risk looks like for extreme events. They are very mistaken, frankly. Climate change, in the very least, provides a valid reason to explore uncertainty, in these models, because we cannot deterministically define extreme events.
Graham Gordon: So we think about what you just said there around the uncertainty, is that restricting people’s faith in the modeling, or is that just somehow we have to accept that nature and explore it more?
Andrew Smith: I think, I think it’s more you have to accept that nature. This is something that even I, in my career building these models, have had to come to accept, frankly, is that uncertainty is baked into the system. With regards to future climate. I mean, we’re essentially dealing with a very complex, non-linear system. And the mathematicians out there will know that, nonlinear non-linear systems, provide chaos, right? They provide that there’s, there’s, there’s often extreme chaos in those models, in those systems. So when you’re modeling extreme events, particularly extreme events deriving from the Earth’s atmosphere, then you have to get very comfortable with uncertainty. So uncertainty is baked into the system regardless of whether climate change is there or not. You have to do away with the idea of, of defining things deterministically. There’s a, there’s always uncertainty.
Graham Gordon: Let’s follow that through. So it’s 2025. And it seems from what you’re saying, the estimation, the planning around for future flood risk, involves working with that uncertainty. So how do we ensure, ensure that the insurance community with this kind of, you know, baked in and low risk appetite, feel confident in the decision making?
Andrew Smith: I can provide my answer to that question. The others will have, will have different answers. The way that we deal with that here, we deal with that uncertainty, is that we try and be as transparent as we possibly can with the models and the methods that we employ. Now that can, can introduce difficulties in and of itself, right? Because you’re effectively owning up to the fact that often your models are, producing large amounts of uncertainty and again, that can make end users, it can make the use of those models difficult, right? Because you’re, you’re revealing the true uncertainty in the models. But that’s how we do it here. We actually go one step further here at Fathom and we, we open our methods and publish them in peer review journals. So we’re actually publishing our methods in the world’s best scientific journals. And the reason that that’s a, I think a step further is that you’re actually opening up the methods to scrutiny from your peers around the world. So you’re saying you’re opening the door and saying, come and have a look at how we built this, and provide your reviews and feedback on how we’ve done it. And I think actually, in the, in the world of modeling future risk, I think that, that is actually critical that we do that. And by we I mean, I mean anybody building models that are dealing with, with climate change. And the reason for that is that we have to try and provide faith in the models that we’re building, and we have to be honest about the uncertainties. There’s, there’s no way, frankly, right, to validate whether somebody’s model of the future is, is good or bad, unless you have a time machine, you just don’t know. So I think transparency is how we do that and [at] Fathom, we publish papers. We also provide additional products alongside our, our, I guess our standard products that provide insights into the models themselves. Where do you have more faith? Where do you have less faith is, I guess, a simple way of defining it.
Graham Gordon: And you mentioned at the start you talked about some of the, you know, the big trillion-dollar loss [of] economic value that’s expressed. I think Swiss Re published [that], the reinsurance or the insurance injury cover 40% of an economic loss. And, you know, what you’re looking at is trying to uncover this protection gap, whether it’s for the businesses, the consumers, or the countries themselves. So we get that kind of like, understanding the true nature of the risk. But going forward, pick up some of the themes you’ve talked about. What’s different about this next generation of tools that you know will go into creating the gold standard of flood modeling?
Andrew Smith: That’s a, that’s a great question. So I sometimes feel like I’m the harbinger of doom. I’m always talking about some of the, the difficulties of the models and the uncertainties and how climate change is making things much worse. So, I guess this is the point to talk about some of the good news. And there’s, there is some very, very good news with regards to, particularly with regards to modeling flood risk. And the good news, is that we’ve made incredible advances and progress in modeling flood risk, particularly, I would say, in the last decade, we’ve gone from only having models of tiny areas. So covering having flood risk models that cover very small areas of predominantly the western world, so having models now that can simulate risk at meaningful scale. So while it’s so-called hyper-resolution models that actually cover the whole planet. So we’re building risk models that that cover every single stream on planet Earth. And that that is really a phenomenal advancement, I would say, a revolution in our modeling capabilities in the past ten years, going from being able to, to model a single river in a single town in England, right? All the way through to building models that cover the whole planet. And in fact, I would argue that particularly in most Western, most of the Western world, where we have better data, we can accurately identify the vast majority of flood exposed areas. So we have good tools now, to, to manage flood risk. And that is, that is great news. We can use these tools to identify and manage our risk and ultimately, make our communities’ economies more resilient. That’s I guess, the message and indeed the tools are now being used by a huge range of organizations far outside of insurance. We started our company to focus on insurers. That’s the kind of, I guess, the, the industry that was used to consuming these kinds of models, we’re insurance companies, right? For, for obvious reasons, but now our models and tools are being used far outside of insurance by governments and banks and manufacturers and engineers. So that is, I think, a real good news story here.
Graham Gordon: Yeah, I wanted to follow up on that. Because, you know, I can’t help thinking about the broader stakeholders. The insurance industry is obviously very good at understanding the cost of an event when it’s all washed through, so to speak. How could, we and combining these large data sets of all that comes up, we have all the, you know, the stakeholders with the governments, the engineers, the planners, town planners, the builders? Is there more we could be doing to combine these data sets to focus more on mitigation?
Andrew Smith: Undoubtedly the answer is yes. I mean, in terms of how joined up these things are, it of course varies hugely depending on where you’re looking in the world, right? There are different, there are different structures and different mechanisms and different systems in different territories and countries around the world. But undoubtedly, there’s, there’s more that can be done. The counter to that would be that lots of these tools are brand new. So, I mean, some of the tools I’m talking about here are literally brand-new science, right? We’re publishing them. Our latest global model, we published in the world’s leading paper in our field a matter of weeks ago. So this is really brand-new science in many ways. So these it’s, in some ways an unsatisfactory answer. But these things take time. And I would hope that the kinds of tools that I’m talking about here will be adopted and used in a broader sense and in a more joined-up way. And we are seeing some good signs of that now. So Fathom’s, just, for example, licensed this data to Public Safety Canada. It is effectively the Canadian government. We’re licensing it to, to state governments in the U.S. who use it for planning purposes. The same data sets are then used by insurance companies to manage exposure on both sides of the balance sheet. So, we’re getting there, but we’re kind of, I think, anyway, at the, the beginnings of that journey.
Graham Gordon: So that the proactive nature of these tools going across the various stakeholder, is, you know, very much on your wish list for what can be done next?
Andrew Smith: Yeah, yeah, absolutely. I this is by no means are we, but I think I’ll, I’ll steal Winston Churchill’s quotes, we’re at the beginning, but it might be at the beginning, the end of the beginning. That’s kind of where we’re at. We’re definitely a long way from having a unified, joined up, efficient, mechanism for managing risk and resilience.
Graham Gordon: Perfect. Well, look, you know, thanks so much for talking to us today, Andrew. And, I am certain we’ll be hearing more about your organization and a lot more, but, flood risk and the climate changes as, as a given. And you’ve certainly given us a lot to think about. And, and I thought I’d, you know, once again, thank you very much for your time with us today.
Andrew Smith: Thanks, Graham. And, again, I’ll say, yeah. Thank you very much for inviting me and, great to talk to you!
Graham Gordon: And to our listeners, as always, thank you so much for spending your time with us today. We love hearing from you. So if you have any comments or would like to follow us on social media, please reach out to us and our channels. And obviously don’t forget to subscribe to the podcast. We’ve got more coming, so stay tuned to our Sapiens Insurance 360 podcast.
