Parametric insurance enables early operation of Swiss flood relief tunnel

By Henry Gale

May 13 - (The Insurer) - A flood relief tunnel in central Switzerland can be used to protect local communities even before its construction is complete, after a novel insurance policy was put in place to cover damages to the project.

The tunnel is being built in the canton of Obwalden to allow more water to flow out of a lake and prevent flooding in surrounding areas. Lake Sarnen and the associated Sarner Aa river overflowed in 2005, flooding Obwalden's largest city Sarnen and causing more than 250 million Swiss francs (around $300 million) in damage.

Although the tunnelling has been completed, other aspects of construction work are ongoing. If a major flood were to occur, the tunnel could either remain closed and expose local homes and businesses to flooding, or open, which would prevent losses in the community but cause damage and delay to the project.

An insurance policy covering the construction site has enabled the canton to take the latter approach.

"For this period from May 1 of this year to the end of June next year (when construction is due to be completed), the canton asked the private insurance industry to cover potential losses from an emergency opening of the relief tunnel," said Eduard Held, managing director of Switzerland's Natural Disaster Pool.

Unusually, this insurance effectively covers a deliberate act of damage: opening the tunnel before it is fully ready. To do so, it uses a parametric trigger. If the water level of the lake, as recorded by a specific gauge, exceeds 471 metres above sea level, the tunnel can be opened and a pre-agreed insurance claim is paid.

If the water level reaches 470.5 metres, the canton can consult with its insurers on whether it will be compensated for opening the tunnel. The trigger threshold is intended to represent a 1-in-30-year flooding event.

Using parametric triggers means that the payment can be made quickly and that no proof of damage is required to pay the claim, which can be complex for construction sites, Held said.

Helvetia is fronting the coverage, which is backed by the ES pool, Swtizerland's natural disaster pool, which spreads natural hazard losses across insurers by their market share. As a result, all the pool's members would face losses if Sarnen flooded again.

Opening the relief tunnel in an emergency could prevent the insurance industry from suffering a loss of tens of millions or even more than a hundred million francs, Held said.

Meanwhile, the maximum insurers would have to pay for damages to the tunnel construction site is just five million francs, a limit which decreases over time as the project nears completion, reducing the potential disruption.

As a result, members of the Natural Disaster Pool were able to agree on the mechanism quickly. "I was surprised myself how much support there was," Held said. "I would expect it could be repeated for something similar."