Flood Re is a flood reinsurance scheme and is principally engaged in the provision of flood peril reinsurance cover within the UK.  The Scheme is a joint initiative between the UK insurance industry and the UK Government and was established by the Water Act 2014.

Flood Re’s purpose is to promote the availability and affordability of flood insurance for eligible UK homes, while minimising the costs of doing so, and manage, over its lifetime, the transition to risk reflective pricing for household flood insurance.

In order to do this, Flood Re provides reinsurance cover at a subsidised fixed rate to cedants, resulting in an expected underwriting loss each financial year. The Company finances this through a levy on UK Household Insurers. The levy also finances the purchase of an outwards reinsurance programme to protect the Scheme up to a £2.1bn maximum liability limit.

The Challenge

Flood Re is regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and is obliged to meet the requirements of the European regulatory framework “Solvency II”.  Solvency II requires firms to protect policy-holders in the circumstances of up to a 1-in-200-year financial loss (defined as the “Solvency Capital Requirement”).  Broadly two approaches to calculate this Solvency Capital Requirement are available to firms: firstly, the default approach “Standard Formula”; or secondly, a more tailored, firm specific “Internal Model”.  Given Flood Re’s unique risk profile it is seeking regulatory approval to use its own Internal Model.

A key tool for reviewing and challenging the appropriateness of a firm’s Internal Model is through an Independent Validation Process.  Given Flood Re’s single region, single peril nature they decided that they would partner with a specialist company to provide a bespoke Independent Internal Model Validation (IIMV) of their Flood Risk Modelling capability.

Ambiental won the competitive tender based on our comprehensive technical experience in model building, testing and validation, as well as our specialist knowledge of flood risk in the UK and Globally.

Our Solution

To help validate the models and data that Flood Re has chosen to use, as well as to check how it is using them, we deployed our rigorous validation methodologies and testing framework to investigate the strengths and weaknesses of Flood Re’s chosen third-party model(s) which are used as a fundamental element of their Internal Model. Stakeholder interviews, data analysis and model validation were just part of the project though.

We also engaged directly with key stakeholders across the organisation to ensure that relevant individuals had the appropriate knowledge of the models depending on the level and function at which they are working – whether it be the senior management or actuarial team.

Our assessment included the evaluation of the governance of the flood model selection process, its use, adjustments to the third party models and internal approaches relative to the Solvency II Tests and Standards.  The Ambiental team also liaised with Flood Re’s advisors and catastrophe modellers to evaluate exposure data management and processing functions.

Another strand of the project was to deliver workshops and training to the Flood Re Risk and Capital Committee (a sub-committee of the Board) to extend knowledge within Flood Re on flood risk validation.

The Outcomes

Ambiental completed the work within the project timescales and on budget, providing analytical tools and detailed recommendations for process enhancements. We also produced a comprehensive Independent Internal Model Validation report which is actively being used by Flood Re in support of its PRA IMAP submission.

Daniel Byrne, CRO of Flood Re commented, “working with Ambiental on this important project has helped us to improve our understanding of the highly complex UK flood peril. Ambiental has provided useful analytics, findings and recommendations which have delivered not only a comprehensive validation of our Flood Modelling approach but also a strong foundation for progressing our medium-long term strategic and business goals in this area. Flood Re aims to continually enhance its understanding of UK flood risk, and Ambiental’s rigorous and flexible approach to model validation and stakeholder engagement is helping us to achieve this objective.  I would have no hesitation of working with them again”.

Flood Re exists to promote the availability and affordability of flood insurance.

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