When Hurricane Sandy swept along the US East Coast in October 2012, it produced a catastrophic storm surge with waves powerful enough to be detected by seismometers as far away as Seattle. The storm proved especially devastating for New York and New Jersey. In New York City alone, widespread flooding damaged over 69 000 residential units. Thousands of residents were displaced and USD 19 billion in damages resulted.

The catastrophe brought to light a concerning reality – the majority of economic losses in these areas were uninsured. "Flood has long been considered a secondary peril," notes Jackie Higgins, Head Public Sector Solutions North America. "However, given the growing concentration of exposures in larger cities, along coastal areas and on flood plains, we need to consider the future threat of flooding to be on par with perils such as earthquakes."

Following Hurricane Sandy’s catastrophic impact, the City of New York started looking at ways to address the physical and financial disruption of floods. Swiss Re began proactively engaging city offices in discussions to help share knowledge – including insights into the benefit of simple parametric solutions. Working with the Bloomberg administration on the Special Initiative for Rebuilding and Resilience, Swiss Re produced robust analyses and projections on flood impact. These enabled city officials to use data points like sea level rise and shifts in hurricane frequency to predict the potential financial impact on New York City. Officials gained an oversight of how future floods might damage the city's assets and building stock.

Megan Linkin, Senior Parametric Nat Cat Structurer for Corporate Solutions, performed the analysis. "We worked closely with the city to understand the distribution and value of assets across the five boroughs, and what economic growth projections were anticipated," notes Megan. "We then ran these asset portfolios through our catastrophe models to determine potential losses. We also isolated the impact of economic growth versus climate change-related sea level rise and hurricane activity." Megan and her team were then able to implement various resiliency measures into their catastrophe models to determine the loss reduction of each, providing the city with the capability to perform a cost-benefit analysis.

Closing the protection gap in New York City

As New York officials realised the importance of closing the flood risk protection gap, Swiss Re’s teams were asked to collaborate with the city on a solution. “Swiss Re already had a deep understanding of flood risk,” notes Jackie. This made Swiss Re a natural partner for government groups working on this ambitious project. “Our innovative developments in parametric insurance have put us at the forefront of understanding this peril and allowed us to deliver an innovative solution,” adds Megan.

Swiss Re joined forces with the Center for NYC Neighborhoods (CNYCN), in partnership with the Mayor’s Office of Climate & Environmental Justice (MOCEJ), the Environmental Defense Fund and SBP USA, to launch a pilot project to provide emergency cash funds to low and moderate-income communities. The group sought to define an insurance solution for high-flood-risk neighbourhoods like Staten Island, Queens and Brooklyn. In these areas, Sandy’s impact had been especially devastating, as residents and businesses had little financial cushion to rebuild with.

Working with the reinsurance broker Guy Carpenter and the satellite technology firm ICEYE, Swiss Re developed a pilot parametric flood programme in 2023. The programme transfers flood risk to the private market, alleviating some financial burden on the city and enabling a more equitable recovery for low- to moderate-income residents of New York City.

"The new programme is a good first step in assisting the city to help low- to moderate-income communities recover more quickly after a flood," explains Jackie.

Under the programme, if a flood occurs, the percentage of each insured neighbourhood inundated by floodwaters is determined based on satellite data from partner data provider ICEYE. If the proportion exceeds a predetermined threshold, Swiss Re will issue a payment to the Center for NYC Neighborhoods, who will subsequently distribute grants to households.

Megan explains: "Parametric insurance provides claims adjudication that is transparent, proceeds that can be paid out quickly and liquidity that can be used flexibly. Growing up and living in the New York area, it is encouraging to see the US’s largest city embrace the value proposition of parametric insurance, and this will hopefully lead to larger and more comprehensive programmes in years to come."

Enabling resilience with a parametric solution

Public Sector Solutions has had a long history of enabling innovative insurance. By working with governments from Uruguay to Nepal, the team has been instrumental in developing bespoke covers to close protection gaps. With the One Swiss Re approach, public sector and natural catastrophe insurance experts like Jackie and Megan often join forces to help find a solution; parametric cover designs are proving fit for purposes in many of these cases.

Parametric insurance pays out when predefined triggers – or parameters – are exceeded, based on specific metrics, such as wind speed, ground shaking intensity or temperature. The payout is automatically triggered upon occurrence of pre-agreed factors in line with the indemnity principle. However, unlike traditional claims-handling setups, there is no lengthy claims adjustment process to determine the value of the loss.