A changing climate and rapidly growing exposure to natural catastrophes presents the world with an unprecedented challenge.
Natural events such as floods and windstorms have caused widespread damage to properties across Europe over the last few decades. Affected further through the effects of climate change and globalised economies, these losses are likely to increase over time. Such trends can already be seen when we look at economic and insured losses as a result of natural disasters over the last 60 years.
From a pre-loss perspective we can consider the ways in which real estate owners and occupiers can help identify highly exposed facilities, estimate likely losses, ensure adequate insurance cover is in place and derive solutions to mitigate future risks.
Extreme Weather Events
Real estate values are being increasingly threatened by extreme weather events, such as storms, hail, flooding, droughts, tropical cyclones, and landslides. The risk of flooding has always been present for buildings close to rivers or coastlines.
We also see an increase in flood risks for real estate portfolios caused by a change in governmental planning strategies and policies. For example, in the UK, land on a flood plain may now be considered for new real estate developments given the pressure to provide new living space in a country with a very high population density.
In addition, climate change as a direct consequence of global warming is anticipated to increase the future frequency and severity of flooding and storms¹.
Flooding can result from a number of different causes – heavy rain, river, and coastal flooding all having the potential to result in damage to buildings and associated contents. It has, for example, been reported that the number of extreme weather events has doubled globally since the 1980s to an average of over 800 events per year during the past decade.
It has been reported that the monetary losses relating to real estate properties and infrastructure systems impacted from severe weather events have tripled globally during the past decade, with direct losses reported from the insurance markets as amounting to US$150 billion (€109.5 billion) per year.
This would imply there’s a need to have a greater awareness and understanding of the broader impact and consequential effects these events can have on a real estate portfolio so that corporation-wide they are treated as a strategic issue.
In this context, we are frequently asked by real estate clients about whether a severe 1:100 year return period flood or windstorm event will be more frequent in the not-too-distant future and what steps can be taken to make the property portfolio more resilient against these severe events.
New Analytical Tools
Today tools and processes exist to help real estate owners and occupiers identify climate-related risks such as flooding, to the extent that they gain a reasonable understanding of the potential losses to a given portfolio and look at solutions to help them make more informed decisions around their risk management needs—whether that is to set risk retention and insurance limits or to aid risk mitigation strategies and improve operational resilience.
This can be achieved through the use of appropriate geospatial mapping techniques to visualise the properties that may be in or out of a specific flood zone, coupled with probabilistic modelling to determine the expected losses the portfolio could suffer when considering a wide range of possible flood events that could occur.
Such models are already widely used and have been for several years within the insurance market to assist with risk transfer decisions. They can also help identify which specific properties within a real estate portfolio are actually driving the overall portfolio exposure, for example on an average annual loss (AAL) basis.
Once individual sites have been identified these may further benefit from a ‘deeper-dive’ site inspection and risk assessment to help uncover local vulnerabilities, estimate the property damage and business interruption (loss of rent) losses in more depth and provide recommendations to help reduce future risks at the site.
The resilience of a facility to respond to a natural catastrophe will also come down to having appropriate business continuity and emergency response plans in place to minimise the potential downtime from a major flood or storm and safeguard the wellbeing of occupiers.
¹(Foresight, 2004; Stern, 2006; IPCC 2013)
Guest Blogger Marc Lehmann is Lead Partner and founding member of Willis’ Strategic Risk Consulting team in London. He is responsible for coordinating, managing and delivering a wide range of natural hazard risk consulting services, including catastrophe modelling and risk engineering assessments.