During this winter of extremes in California, with tragic wildfires raging in the south and most of the season’s rain falling in the north, the insurance market has fallen only deeper into crisis. But one flood insurance product for local governments recently launched in the state models a different approach designed for such erratic climate patterns.
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The County of Monterey, which spent upward of $100 million to recover from flooding during the prior two winters, is among governments statewide looking closely at the new flood insurance option. Monterey County had applied for relief from FEMA after atmospheric rivers saturated the region, but it still awaits some of the federal reimbursement. By contrast, the new insurance product, which uses a structure dubbed “parametric,” vows to immediately deliver smaller payouts for a flexible range of emergency costs.
“We would be doing a disservice not to explore these new and emerging insurance structures because we’re always looking for innovations that can help our county,” said David Bolton, Monterey County’s risk manager who helps the county manage its insurance.
Flood damages during recent winters tested the County of Monterey’s financial safety nets. A levee breach severely disrupted life for the mostly low-income community of Pajaro, and the Salinas, Carmel and Big Sur rivers all topped their banks. The county has 20 insurance lines, including for its properties, but relies on FEMA to cover damage to public infrastructure during disasters. The county, however, had to pull from reserves and state loans to repair its roads, bridges, buildings and parks with FEMA bogged down with claims and notoriously slow to deliver. Meanwhile, in the immediate aftermath, most renters and homeowners largely fared alone.
Much of California shares Monterey County’s story. In the winter of 2022 to 2023 in California, atmospheric rivers caused in the ballpark of $4.6 billion in damages, with just up to around $1.5 billion of those losses insured. Less than 2 percent of California homes have flood insurance — most of which comes from FEMA’s National Flood Insurance Program.
To fill this flood insurance gap with a supplemental option, the flood monitoring start-up Floodbase and insurance broker Amwins partnered to bring the first-of-its-kind parametric insurance product to the market last fall for California municipalities. A key distinguishing aspect is flexibility: a city, town or county can apply their payout as they see fit, including to fund emergency response, make up for lost tax revenue, fund residential rebuilding programs, or rebuild public infrastructure.
At least one California municipality has purchased the product so far, according to the founding companies — but it’s so new, they did not want to disclose which one.
The new California parametric flood insurance diverges from traditional, or “indemnity,” insurance, where a customer and insurer endure a long, claims adjustment process of examining damages to determine the payment. For parametric, the magnitude of floodwaters — not the actual damages — triggers an immediate payout. And that rapid payout scales with the flood: the larger the flood, the more cash.
“Explaining parametric insurance is pretty hard,” admitted Alex Kaplan of Amwins, while discussing the product at Climate Week in New York City last fall. “Especially because everyone is so used to the indemnity-based structures that we’ve all grown up with, it breaks the brain a little bit.”
The new California offering emerges among a range of parametric products for different types of disasters — including wildfires — slowly making inroads nationwide and globally, as the climate changes. Although the new California product is not for individuals, local governments can use their payouts to assist residents.
“Cities, towns and counties are left in this bind because they have to think not only about the physical damages that they might get some traditional protection for, but the community impact,” explained Emmalina Glinskis of Floodbase, which supplies flood data for a wide range of partners, including FEMA, USAID and the UN. “What if your constituents are impacted and they weren’t insured, or they’re low-income, or they’re displaced?”
Floodbase provides the newer technology that makes the parametric policy possible.
Floodbase, using machine learning, offers a mix of real-time and historical flood data pulled from satellites, ground sensors and hydrological models. Therefore, all parties can make an informed decision about how much insurance a customer should purchase based on its flood risk. Ultimately, the agreed-upon policy spells out the exact flood magnitude, measured in square kilometers of ground covered by floodwater, that triggers a payment.
Premiums vary based on a location’s unique flood risk and how much coverage a municipality decides to purchase, within its budgetary constraints. The numbers at play are relatively modest: the minimum premium for a policy is $65,000, and limits in coverage range from $1 million to $50 million.
For insurers, parametric insurance policies can offer more certainty and potentially decrease costs, said Karen Collins of the American Property Casualty Insurance Association at a recent California State Assembly insurance committee hearing.
“For insurers, parametrics can increase the certainty, by capping the total amount of liability — since that payment is based on a trigger being met, rather than the actual losses,” said Collins at the hearing. She added, “In reducing resources needed to support both underwriting and the claims adjustment process, you would also see insurers benefit in that they can respond to their customer’s needs more quickly.”
For the insured, parametric policies certainly come with risk. Floodwaters could rise enough to cause damage but not enough to meet the established trigger, leaving a municipality empty-handed. Or, the waters could meet the trigger but lead to losses that exceed the payout.
“I think that there is an education gap that exists and needs to be closed, as people start thinking about and purchasing parametric insurance,” said Deborah Halberstadt, a special advisor to the California Department of Insurance. “I would want to be sure that the city understood what it was buying, and that residents understand the benefits and the limits.”
At the same time, Halberstadt remained optimistic. “There’s a huge amount of interest in parametric insurance,” she said. “There’s a lot of thought around how transformative it could really be.”
For some parts of Monterey County, new safeguards against flooding are especially urgent. In Pajaro, the community of largely lower-income earners still faces high flooding risk today, as residents await the planned overhaul of an outdated, undersized levee system. (The county continues to search for, and receive, funding sources for Pajaro.)
In the coming months, Bolton of the County of Monterey plans to weigh the pros and cons of the new California parametric insurance product with his risk team, county leadership and peer risk managers in the region.
“There’s still some research, some due diligence, necessary,” Bolton said.