Grey Swans with Long Tails: What Benefit Can a Longer-Term View of Flood Risk Bring?
Snapshot
- The 2022 floods in New South Wales and Queensland caused the largest insurance loss in Australia’s history. The financial impact and geographic extent of the floods took many by surprise.
- Contemporary risk modelling uses observational data to estimate the frequency and size of unprecedented extremes. However, this approach has significant uncertainty if the observational record is short.
- Leveraging longer term paleo-climate records of historical floods can provide powerful insights and context to our current understanding and inform better risk management decisions.
This content is prepared in collaboration with Associate Professor Tim Cohen, Environmental Futures, University of Wollongong.
In our latest insights we dive into the possibility of integrating longer-term, “paleo-flood” records to complement our understanding of what truly extreme flood events look like, and how this may change our understanding of tail risk and help to improve risk management strategies.
Developed in collaboration with Environmental Futures at the University of Wollongong, this paper explores:
- Historical Context of Floods: The 2022 floods resulted in over AUD $6 billion in insurance losses, yet they were smaller than historical floods such as those in 1867. Evidence suggests even larger floods have occurred previously.
- Role of Catastrophe Models: Insurers use catastrophe loss models to estimate risks associated with extreme floods, generating synthetic flood events to inform their reinsurance decisions and pricing strategies.
- Impact on Lenders: Financial institutions face risks from extreme floods as they may lead to decreased property values and potential loan defaults if borrowers in flood-prone areas lose insurance coverage.
- Government Responsibilities: Governments must consider long-term flood risks when planning infrastructure and development in floodplains, as these decisions can have enduring consequences for community safety and financial stability.
- Uncertainties in Flood Modelling: The process of flood modelling is fraught with uncertainties, especially when estimating the return periods of extreme rainfall and the resulting flood impacts.
- Paleo-Flood Evidence: There is potential to enhance flood risk understanding by integrating paleo-flood records to identify historical flood magnitudes that exceed modern observations.
- Sensitivity of River Basins: The extent of floodplains is uncertain, with estimates suggesting that changes in the Probable Maximum Flood (PMF) could significantly alter the number of properties classified as being within flood-prone areas.
- Need for Research Collaboration: The document calls for more targeted research and collaboration between industry and academia to better understand flood risks and improve management strategies.
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