Z Zurich Foundation: Building the Case for Effective Insurance in Flood-Prone Areas

Introduction

Established in Zurich, Switzerland, in 1872, Zurich is one of the world’s leading insurance groups, providing insurance and services to customers in over 170 countries. Zurich’s mission is to help its customers ‘understand and protect themselves from risks’.

The Z Zurich Foundation contributes to sustainable social and economic development by combining Zurich’s global experience and risk-management capabilities with non-profit organizations’ local knowledge and development expertise.1 It takes a long-term cooperative approach to tackling selected global challenges.2

The Zurich flood resilience programme is an example of how this cooperative approach can help develop new customer solutions for Zurich, initiate public policy discussions, and create value for communities worldwide.3

Ecosystem Pain Points

Insurance companies have observed an upward trend in weather-related insured losses due to the increase in frequency and intensity of extreme weather events and the increasing economic cost associated with them.4 Damage caused by natural catastrophes such as floods have quadrupled in the past thirty years.5 As David Nash, the Foundation Manager at the Z Zurich Foundation, explains:

Flood risk is likely to increase in the future due to a combination of socio-economic factors and anticipated increase in the frequency of extreme weather and climate events. It is a global challenge which impacts both developing and developed countries. Despite being a global issue, effective flood risk management is highly complex and there is no one-size-fits-all solution to implement universally.6

Extreme weather events of this kind cause large economic, social, and humanitarian losses.7 Many developing countries are located in high-risk areas, with regular floods affecting large parts of the population. Currently, approximately 800 million people are living in flood-prone areas, of which on average about 70 million actually experience floods each year.8

In developing countries severe floods can put at risk past development gains by damaging the natural capital and infrastructure that people rely upon for shelter, transportation, and agriculture, undermining economic development and setting back poverty-reduction efforts. Although total economic losses from floods are higher in developed countries, both the relative economic impact and the number of fatalities are more significant in developing countries.9 Globally, the rising costs associated with climate change effects pose serious challenges to governments in adopting efficient strategies to manage the increasing economic consequences.10

Governments, overseas development agencies, and philanthropic organizations are all involved with efforts to mitigate the effects of floods. However, the vast majority of investment in this area is reactive—it focuses on disaster relief rather than on pre-event planning. In fact, only 13 per cent of disaster-related funding currently targets resilience-building, while 87 per cent goes into activities after the losses have occurred.

This is where the insurance sector comes in. Insurance is a risk-transfer mechanism; transferring risk to the private sector could provide efficient and cost-effective solutions that relieve already strained public-sector budgets. However, unless you tackle the circumstances that lead to or create the risk, it can be too expensive to insure against or, in extreme situations, not worth insuring at all.

There needed to be a greater focus on flood prevention or flood resilience. As Nash describes:

Should a flood occur, taking action beforehand which reduces the potential losses is more cost-effective than providing post-disaster relief. The more resilience that is built, the more insurance can be brought in to play its part in strengthening resilience by providing reliable and swift pre-determined financial compensation.11

Business Strategy

In 2013, Zurich launched a global programme to enhance flood resilience. Flood risk is the result of many factors in a dynamic, complex system. As a Zurich brief outlines, ‘a system-wide approach to resilience needs to capture a range of activities, actors, and processes that are part of a resilience building system.’ Therefore, in the first phase, the Zurich flood resilience programme worked in partnership with four core partners: International Federation of the Red Cross and Red Crescent Societies (IFRC), Practical Action, the International Institute for Applied Systems Analysis (IIASA), and the Wharton Business School’s Risk Management and Decision Processes Centre (Wharton).

Through these partnerships, Zurich created an alliance—the Zurich Flood Resilience Alliance—which has developed processes and tools that can be applied to increase flood resilience at the community level. One such innovation to emerge from these collaborations is a flood resilience measurement framework.

By building resilience, Zurich aims to create an environment in which insurance and other risk-transfer mechanisms can help to address the problems of climate-change-induced disasters such as floods.12 Zurich has found that it is well placed to educate communities about risk-prevention measures; and this process has helped to increase insurability. It is thus in Zurich’s business interest to support public policies that reduce and make risks more predictable. Moreover, Zurich’s model shows the potential of private industry to help communities bolster their resilience to flood risk.

The flood resilience programme tests solutions and ideas for replication and scale. Expertise and knowledge from Zurich contributes to these ideas and, in turn, the insights generated from the community experience can be used to refine and tailor insurance solutions and risk management processes.

Research and knowledge is also generated and refined by academic institutions in the flood resilience alliance. The insights gained allow Zurich to develop new technologies and innovations to prevent flood damage.

This interdisciplinary approach broadens the scope of current flood resilience research and offers opportunities to advance understanding of the impact of floods. The knowledge and tools generated are intended for a wider audience and will be made available in an open source format, through a portal and the development of an academy.

Performance

The Zurich programme runs interventions with communities in flood-prone areas in Mexico, Indonesia, Nepal, Peru, and Bangladesh,13 using slightly different interventions according to the context in which they operate. For example, in Nepal, access to efficient early warning systems, alternative livelihoods, and strengthened collaboration with local decision-makers are key to enhancing resilience.14 In Mexico, there is also a livelihoods component, but the focus remains on developing local support mechanisms within communities.

In Indonesia, the Zurich Flood Resilience Alliance has found ways to help communities in the river basin of the Bengawan Solo, the longest river on the island of Java, which frequently floods during the rainy season. The programme has proven so successful that local authorities are now using Zurich’s approach to help more communities across Java.

Together with the Indonesian Red Cross, Zurich identified the communities that are most likely to benefit from its resilience approach. In the village of Tulungrejo, for example, the community has access to an emergency shelter that the government has provided. However, the shelter is too far for some people to reach. As a first step, the Zurich programme has provided funds to build a raised evacuation site nearer to the village that can accommodate several hundred people. Safe routes were created across the village to the new shelter and local volunteers were trained as first-responders to form a community-based action team, or SIBAT.

Beyond these initial steps, the Flood Resilience Alliance is developing a better early warning system in Tulungrejo and has built a command post, POSCO, that can serve as a crisis centre for emergency response teams during floods. Once established, it will be equipped with technology to provide early warning bulletins, weather reports, and other important public announcements.

To increase the impact of the measure, when not in use during floods, the community volunteers’ action team (SIBAT) will conduct flood simulation exercises from the centre. As part of the programme, the Indonesian Red Cross has also introduced activities to raise community awareness, particularly in schools.

The local government in the Bojonegoro district values this volunteer approach, which has been formally endorsed by the district administration. Local administrators have already provided funds to similar projects in another village in Bojonegoro district to set up SIBATs, and are recommending that the model used in Tulungrejo be adopted and implemented in all at-risk communities in the province. District officials believe the programmes could even be adopted nationwide. The intervention has enhanced physical capital through the new evacuation site and better early warning systems. These additions have reduced the time needed to react to floods. In addition, by increasing local knowledge, complementing SIBAT’s efforts to increase knowledge and capabilities on a sustainable basis, the programme also enhances human capital.15

The programme, moreover, has had a positive impact on Zurich’s business. Internally, 93 per cent of staff are proud of Zurich’s work in this area, and almost half have volunteered to be part of programme activities. In fact, Zurich has also been able to engage local brokers in the activities. Brand awareness has noticeably increased, with Zurich winning a local insurance industry award for its efforts. The work has helped engage corporate customers and their employees. Taken together, these initiatives strengthen relationships among a variety of key stakeholders.

Other outputs of the alliance have included the community-based flood resilience measurement tool, currently being deployed by Zurich’s community partners in more than 110 communities on a trial basis. It is also being scientifically validated through the research partnership with Wharton and IIASA (International Institute of Applied Systems Analysis).16 The aim is to understand what helps a community build resilience to flood disasters, and thereby identify possible resilience-building actions. This tool is used across all country programmes. This is cutting-edge applied research that will fill a gap, as there is no other measurement framework for disaster resilience available, according to UNDP.17

It also provides objective evidence that can influence policymakers’ decisions in shaping responses to other climate-change-related risks. Demonstrating the business case for its flood resilience programme to policymakers, Zurich studies show that for every dollar spent on selected flood risk reduction measures, an average of five dollars is saved through avoided and reduced losses. Although climate change is one factor driving floods, policymakers’ responses to climate change risks can help manage these impacts.

Prognosis

The topic of floods remains important to Zurich. In July 2018 they launched a second phase of the work for an additional five-year period. The core focus will be to strengthen the evidence base around the resilience measurement approach, through community programmes, and use it to push for more investment from other actors into pre-event work.

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Notes

1. ‘Z Zurich Foundation Annual Report 2014’, Zurich Insurance Group.

2. ‘Z Zurich Foundation Annual Report 2014’, Zurich Insurance Group.

3. ‘Z Zurich Flood Resilience Programme’, Zurich Insurance Group, https://zurich.com/en/corporate-responsibility/creating-value-for-zurich-and-society Z Zurich Flood Resilience Programme.

4. The ClimateWise, ‘Thought Leaderships Series’ Issue Two, Cambridge Institute for Sustainability Leadership, 2012, http://www.cisl.cam.ac.uk/publications/publication-pdfs/climatewise-thought-leadership-series-2012-issue-t.pdf.

5. Surminski and Oramas-Dorta (2013).

6. David Nash, the Foundation Manager at the Z Zurich Foundation. Personal communication with SBS team.

7. ‘Information about Zurich’, Zurich Insurance Group, https://www.zurich.com/.

8. Fankhauser and Thomas (2016).

9. Surminski and Oramas-Dorta (2013).

10. Business Perspectives LLC., https://businessperspectives.org.

11. David Nash, the Foundation Manager at the Z Zurich Foundation. Personal communication with SBS team.

12. ‘Information about Zurich’, Zurich Insurance Group, https://www.zurich.com/.

13. Zurich North America—Insurance and Risk Management’, Zurich North America, https://www.zurichna.com.

14. ‘Information about Zurich’, Zurich Insurance Group, https://www.zurich.com/.

15. Freiner (2016).

16. International Institute for Supplied Systems Analysis, http://www.iiasa.ac.at/.

17. Winderl (2014).

Case Study Contributors

• Helen Campbell Pickford, University of Oxford

• David Nash, Z Zurich Foundation

• Justine Esta Ellis, University of Oxford

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