Flood Adaptation Preferable to Post-Disaster Rebuilding – And Helps With Insurability

Economic losses caused by natural catastrophes reached an estimated US$280 billion in 2023, with US$51.6 billion of that total due to floods, according to Swiss Re Institute.

As climate change intensifies extreme weather events and rapid urban sprawl increased asset values in high-risk areas, these flood losses are likely to keep rising, said Swiss Re in a report titled “Resilience or rebuild? The costs and benefits of climate adaptation measures for flood.”

The report answers the question in its title: Boosting flood resilience is preferable to rebuilding after a flood and has the added benefit of helping with the long-term insurability of these risks.

“Proactive flood adaptation provides stable financial and social benefits, unlike the high costs of post-flood recovery and rebuilding. Minimizing flood risk also makes insurance easier to obtain and more affordable, which is crucial as climate change intensifies and causes more frequent weather-related disasters.”

If governments and public authorities help manage the impacts of natural catastrophes through risk mitigation actions that focus on avoiding and reducing future natural catastrophe losses, “the residual risk can be transferred appropriately to the re/insurance industry, supporting post-disaster economic stability and growth,” Swiss Re said.

“Over the past five decades, floods caused almost one-third (31%) of natural catastrophe losses,” the report added. “Consequently, focus on flood and climate adaptation has increased, with the governments in 85% of countries implementing climate adaptation plans.”

However, Swiss Re Institute noted many countries still refrain from prioritizing adaptation investments despite seeing repeated significant floods, which are the most common urban natural catastrophe—affecting 58% of cities worldwide.

Currently, France, Germany, Italy and UK have the highest expected annual damage (EAD) due to flood risk, while France, Germany, Italy and Poland “are amongst the countries in Europe with the highest level of population exposed to flood risk,” the report said.

Benefits of Risk Transfer

Swiss Re said the re/insurance industry can assist governments and policymakers with their understanding of risk exposures, while offering capacity and de-risking solutions to aid in the development of interventions, ensure rapid recovery, and manage residual risks.

“All interventions can be beneficial for insurers and policyholders,” the report said. “If government agencies sufficiently and transparently inform insurers of measures they have taken, it can be the basis for insurers to revisit their risk modelling.”

The report cited the example of homeowners’ insurance premiums, which dropped by 34% for more than 500 houses after the construction of a flood levee in Roma, Queensland, Australia, following floods in 2012.

“Whilst re/insurance is traditionally a tool to manage the after-effects of significant shocks and events, it can also support risk mitigation, resilience building and adaptation investments through innovative solutions and early involvement in design and planning,” the report added.

“Including insurance at the planning and design stage can help enable the building of resilient infrastructure, as insurance provides financial protection against delays and damage, so projects can remain on time and within budget, delivering target returns and attracting investment,” Swiss Re said.

“When governments shift risk to the private sector through insurance, they need to retain less capital for disaster recovery efforts. This frees up funds that can be redirected into risk prevention and adaptation.”

Adaptation Investments Lagging

Despite enduring significant floods, many countries still refrain from prioritizing adaptation investment, Swiss Re said, noting that protective measures such as dykes, dams and flood gates come at a price, but their financial benefits can exceed costs for rebuilding after a disaster by up to 10 times.

Highly flood-prone countries, such as New Zealand, Australia and Germany, currently emphasize post-flood rebuilding over pre-event adaptation, the report said.

For example, Deloitte in 2016 revealed that central and state government spending in Australia on natural catastrophe building resilience was A$100 million per year and funds spent on disaster recovery were A$2.75 billion per year, said Swiss Re, quoting the Deloitte report titled “Building Australia’s resilience to natural disasters,” which was published in March 2016.

“This is despite the fact that pluvial and fluvial floods alone cost Australia A$8.8 billion every year,” the Swiss Re report said, adding that in 2024 the Australian federal disaster recovery support to states reached A$11.4 billion.

“By investing in adaptation, companies can reduce their physical risk, and governments can reduce the risk to public assets and communities. Flood adaptation measures can be considered by insurers in their risk assessments. Quantifiable risk reduction can in turn be reflected in future insurance premiums, limits and offers of cover,” the report stated.

“Investments in climate adaptation, such as flood preparedness, not only promote economic stability and create jobs, but also help keep people safe,” commented Veronica Scotti, chairperson Public Sector Solutions at Swiss Re, in a statement accompanying the report.

“Yet there is chronic underfunding. It is therefore crucial to create the conditions for private capital to flow into climate adaptation projects and at the same time optimise the use of public funds. Quantifying the benefits of adaptation measures is a key step towards facilitating public-private investment and ultimately closing the huge financing gap,” Scotti said.

Best Flood Adaptation Methods

To determine the best flood adaptation methods to ensure a community’s health, safety, and economic stability, Swiss Re Institute suggested employing benefit-to-cost ratios (BCRs) as a standard measurement for comparison of these methods. (BCRs will aid in the decision-making process to compare the cost effectiveness and efficacy of flood adaptation initiatives and policies.)

The report highlighted the fact that in 2023 Swiss Re Institute assessed BCRs for adaptation to flood and heatwaves across a range of global studies and found the net economic benefits of interventions can outweigh the cost in a range between 2:1 and 10:1, in some cases even more.

“Using BCRs, we find that grey infrastructure, such as dykes and levees, has the greatest potential for reducing coastal flood damage. Coastal communities in developed regions with medium-to-low sea level rise projections can maximise adaptation BCRs through dykes. Nature-based solutions should also be explored,” Swiss Re went on to say.

For river flooding, “detention areas have the highest BCR and could reduce expected annual flood damage in Europe by 75%,” the report said, explaining, however, that these solutions can be challenging to construct in areas of limited space and narrow floodplains.

“Strengthening existing dykes can cut river flood damages by 60% and offer the most economic benefits in densely populated areas,” the report added.

“No single flood adaptation method will be ideal for every situation, and flood risk cannot be completely eliminated,” Swiss Re cautioned. “The most appropriate way to manage flood risk will depend on localized factors such as: estimated annual damage; nature of flood risk; exposed population and assets; resources and costs involved; BCRs; available space; efficacy of an intervention; lifetime of increased resilience due to an intervention; and construction timelines.”

Photograph: Cars piled up in the street following floods in the Sedaví area of Valencia on Oct. 30, 2024; Photo credit: David Ramos/Getty Images Europe