Will IoT cause a new flood of natural disaster insurance?

Do you think global warming is going to impact you? And are you aware of how damages caused by natural disasters are insured? In the Netherlands, the scenario of a flood or earthquake determines how compensation is handled. However, IoT offers great opportunities for preventing financial losses.
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Financial impact of natural disasters 

Earthquakes, floods, hurricanes, tsunami’s, tornadoes. We come across evidence of man-made global warming on a daily basis. While there are many terrible outcomes of global warming, the financial loss caused by a natural disaster can be substantial. For example, the heaviest earthquake in the history of the Netherlands struck Roermond on April 13, 1992. With a force of 5.8 on the Richter scale, the quake caused approximately €125 million in damages of which €77 million in the Netherlands. On top of that, the Meuse river flooded in 1993 and 1995, causing additional damages of €115 million and €75 million respectively.

[Personal note by the author, Kevin Peters] 

These three disasters had a huge impact on Limburg, the southern Dutch province where I grew up. I have a vivid recollection of the Meuse river flowing through my backyard as it burst its banks more than 550 meters. The pictures below were taken by my father and show a home affected by the flood and a picture of me standing in our backyard looking at the flooding. My parents did not suffer any serious damages, though not everybody was this lucky.

Compensation is not a certainty

With so many damages affecting Dutch citizens, the Dutch government decided that regulatory changes were needed to properly deal with natural disasters. To cover damages caused by nationwide earthquakes and flooding, the Dutch law ‘Compensation for damage in case of disaster’ (Wet tegemoetkoming schade bij rampen) came into effect in 1998.

Despite these efforts to offer more regulatory clarity, compensation in case of an earthquake or flood is still not secured by law. And the risks are huge! The Lloyd’s City Risk Index shows that the Dutch economy currently puts around €452 million at risk when a flood would occur in Amsterdam, Rotterdam and The Hague. However, the stakes are even higher when moderate and extreme scenarios are taken into account. Many of you will be surprised to learn how much is at stake for Amsterdam in an extreme scenario. An extreme flooding scenario is classified by Cambridge Centre for Risk Studies as 50 percent of city land area affected by a flood reaching up to two stories high with high-velocity destructive water flows, and highly polluted waters. In the capital of the Netherlands, this scenario would mean damages equivalent to €55 billion. The Lloyd’s City Risk Index shows that losses in Rotterdam and The Hague would also be enormous as can be seen below.

 

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What's covered by natural disaster insurance

For many, it remains unclear who would end up paying for the losses when a natural disaster occurs. A report by the Dutch Association of Insurers shows that 46 percent of the respondents think that their insurer would pay flood damages, 35 percent believe the government would, and 30 percent think several insurers would compensate damages together.

In reality, compensation depends on the flood scenario. Some scenarios are insured by home insurance whereas others are not. For example, a flood caused by an overflowing sewer is often insured by home insurance. Yet a flood caused by the failure of a regional flood defense is not.

<p>Will IoT cause a new flood of natural disaster insurance? - Man walking in high water - by Accenture</p>

Generally speaking, flood and earthquake scenarios are insured through home insurance or natural disaster insurance, or victims are compensated by the Dutch government. There is, however, currently only one provider of natural disaster insurance (i.e. flood insurance) in the Netherlands. The Dutch law ‘Compensation for damage in case of disaster’ makes a financial arrangement possible for the ones affected by an earthquake or freshwater flood, leaving salt water flooding for what it is. The law stipulates that the compensation is determined by ministerial regulation. In other words, compensation depends on political discussions, making it uncertain for citizens and businesses if and how much they will be compensated.

Obviously, there is room for interpretation of what’s covered by natural disaster insurance and what’s not. Could perhaps new IT bridge that gap and play a vital role in how these disasters can be insured? Or is preventing damages the way forward? Whatever road you choose, IoT might be the best answer to the problem.

<p>Will IoT cause a new flood of natural disaster insurance? - Bridge the gap - by Accenture</p>

How IoT can spur prevention

An ounce of prevention is worth a pound of cure. And IoT is the solution to go for as it offers you numerous advantages.

Insurers nowadays already attract new customers with smart technological applications, while using these innovations to improve their profitability. Think of IoT use cases such as Pay As You Drive, where the driver only pays a premium based on kilometers driven. Or smart smoke alarms in homes, where the alarm detects smoke or carbon monoxide and alerts the customer about the location by a push notification on their phone.

More importantly, smart devices connected through IoT are already assisting in coping with and decreasing the impact of natural disasters in other parts of the world. Many opportunities within new IT are actually focused on the prevention of natural disasters.

Many opportunities within new IT are actually focused on the prevention of natural disasters.

Real-life IoT examples

In the Netherlands, for instance, IoT is already used to gather information from smart sensors that detect when maintenance of dikes is needed. However, the opportunities IoT offers go much further than just signaling maintenance. Predicting and communicating rising water levels and real-time sewage drainage capacity or activating flood defenses in periods of heavy rain are all real possibilities.

<p>Will IoT cause a new flood of natural disaster insurance? - Flooded office - by Accenture</p>

You can already find several real-life examples across the world of IoT technology having prevented losses. There's a story about a bushfire victim in Australia who saved his house with an irrigation system that allowed him to remotely turn on the sprinklers. Another example involves the citizens of Calderdale, a metropolitan borough of West Yorkshire, United Kingdom, who were struck by severe flooding in 2012 and 2015. To prevent it from happening again, they’ve decided to set up a network of flood sensors that warn the citizens when a flood is likely to happen. Residents can then use the time saved to take precautionary measures.

Smart homes embedded with IoT-enabled earthquake and flood defense systems could sense an earthquake or flood activating home defenses, mitigating damages. In turn, this could dramatically reduce or even prevent the financial and social losses caused by a natural disaster.

Claim handling optimization

Beyond calculating the likelihood and risk for individual policyholders of water damage, insurers could also automatically reach out to individuals to offer advice and optimize the claim handling process when a natural disaster occurs. A connected home, enabled by IoT systems, can record important data about the event, gather all the relevant information, and instantly act upon that information to combat current threats. Also, the information that is collected from the IoT-enabled devices leads to trustworthy documentation of the disaster, which results in a reduction of the throughput time of processing and managing claims. In turn, that will hugely benefit your customer experience.

Will IoT cause a new flood of natural disaster insurance? - Earthquake crack - by Accenture

Are you ready to take on IoT?

The examples we've given you offer an accurate overview of the many practical solutions IoT can offer. The question now is whether insurers and governments gain inspiration from the stories of the bushfire victim in Australia and the citizens of Calderdale? It needs careful thought whether more natural disaster scenarios should be compensated by the state or covered by natural disaster insurance. Without a doubt, the financial impact for every actor involved could be enormous. IoT could help bridge the gap of what is insured and what is not.

What's more, IoT is a process optimizer. As mentioned above, think of optimizing the claim handling process after a natural disaster, as explained in this video.

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IoT is already making a difference in people’s everyday lives. The possibilities of the technology are enormous. Is it time to extend natural disaster insurance coverage with the help of IoT? Are you ready to use IoT in optimizing your business?

IoT could help bridge the gap of what is insured and what is not.

Author: Kevin Peters