Talk Components. Wharton Risk Center & Research Context TC Flood Research Approach Freshwater Flood Main Results

Dr. Jeffrey Czajkowski (jczaj@wharton.upenn.edu) Willis Research Network Autumn Seminar November 1, 2017

Talk Components Wharton Risk Center & Research Context TC Flood Research Approach Freshwater Flood Main Results Freshwater flooding risk identification & spatial characterization Statistical results and their utilization Claim Damage Analysis Concluding comments

Freshwater Flooding from Tropical cyclones continues to be a significant issue in the U.S. Hurricane Matthew - October 2016, inland flooding losses represented about half of the insured losses and three quarters of percent of total loss (insured and uninsured) including both wind and surge loss estimates http://www.riskmanagementmonitor.com/tag/hurricane-matthew-insured-losses/ Hurricane Harvey August 2017, inland flooding nearly all of total insured losses Region Wind Storm Surge Inland Flood Total Texas 2-3 < 0.1 20-35 22-38 Louisiana - - 1-2 1-2 Total 2-3 < 0.1 21-37 22-40 https://www.rms.com/newsroom/press-releases/press-detail/2017-09-09/rms-estimates-hurricane-harvey-insured-losses-from-wind-storm-surge-and-inland-flooddamage-will-be-between-usd-25-and-35-billion

A risk that has been recently recognized by the Industry As the private flood insurance market continues to take shape, enhanced flood analytics can be used to gain important insights into potential flood events before they occur, particularly along the coast, allowing (re)insurers to be more proactive than reactive when developing, managing and growing a profitable flood portfolio Exposure, RMS.com

Risk Center research on this emerging issue http://www.nature.com/articles/srep41609/

8 An Integrated Approach 1) Quantify the spatial extent and magnitude of freshwater flooding related to TCs at the regional scale 2) Combine the quantified flood magnitudes with associated inland flood claim information from the NFIP database 3) Empirically demonstrate that our approach to quantify flood magnitude is a key driver of the insured economic losses experienced

Data from 28 North Atlantic TCs with USGS station located within 500 km from the center of the storm over the period 2001-2014

8,030 NFIP communities are impacted on average per TC (>1/3 of total NFIP communities)

Defining the Flood Hazard normalized 2-year flood peak ratios = max flood peak from 2 days prior and 7 days after passage of storm 2 year return period (median of 20+ year historical record) leverage existing NWS flood classifications & interpolate Maps showing the flood ratio values stratified according to the NWS flags for Hurricane Irene (2011; left panel) and Hurricane Sandy (2012; right panel).

Relating the flood ratio to flood status classification. This figure shows the relationship between flood ratio values and flood status classification according to the National Weather Service (Action, Bankfull, Minor, Moderate and Major Flooding) for all the stations in our domain. In each boxplot, the limits of the whiskers represent the 0.1-0.9 quantiles, the limits of the box the 0.25 and 0.75 quantiles, while the line in the middle of the box the median (0.5 quantile). The colored horizontal lines represent the limits of the three categories in which we have stratified the flood ratios: a flood ratio below 1 is for bankfull conditions; a flood ratio between 1 and 1.5 represents minor flooding conditions, while values between 1.5 and 2.2 and larger than 2.2 are indicative of moderate and major flooding, respectively.

Main outcomes of the research are: 1) the identification of the areas that are more at risk from freshwater flooding from North Atlantic TCs; 2) the characterization of the extent and magnitude of these events; 3) the development of statistical models relating flood magnitude to direct economic losses (number of claims) controlling for exposure and vulnerability aspects 4) the use of the resulting empirical relationships to perform sensitivity analysis examining potential impacts of interest such as climate change precipitation.

~ 10 percent of the impacts NFIP communities have experienced are minor flooding or greater

Over 6,000 NFIP community experienced major flooding from these 28 TCs

Main outcomes of the research are: 1) the identification of the areas that are more at risk from freshwater flooding from North Atlantic TCs; 2) the characterization of the extent and magnitude of these events; 3) the development of statistical models relating flood magnitude to direct economic losses (number of claims) controlling for exposure and vulnerability aspects 4) the use of the resulting empirical relationships to perform sensitivity analysis examining potential impacts of interest such as climate change precipitation.

443,484 total residential non-surge claims with a median of 3,818 claims per storm Total claims are concentrated in 6,600 NFIP communities with at least 1 policy in force

Minor flooding or greater, overlaid with claims

Regression Results NWS minor, moderate, and major flood classifications (based upon 2 yr. RP) are positive and statistically significant drivers of higher flood claims per impacted community robust across a number of model runs Control for a number of other relevant factors: Number of housing units & NFIP policies-in-force Percent of NFIP community classified as high to low flood risk Percent of NFIP community impervious surface coverage TC type tropical storm, minor hurricane, major hurricane NFIP community distance to coast Year and geographical fixed effects

Main outcomes of the research are: 1) the identification of the areas that are more at risk from freshwater flooding from North Atlantic TCs; 2) the characterization of the extent and magnitude of these events; 3) the development of statistical models relating flood magnitude to direct economic losses (number of claims) controlling for exposure and vulnerability aspects 4) the use of the resulting empirical relationships to perform sensitivity analysis examining potential impacts of interest such as climate change precipitation.

Percentage increase in the number of flood claims 1% increase in flood ratio 0.7% 5% increase in flood ratio 3.5% 10% increase in flood ratio 8.6% 20% increase in flood ratio 17.1% Urbanization increase 2.4%

Hurricane Harvey Flood Type % of Communities Mean Housing Units % Impervious Surface % High Risk Zone Bankfull 80% 4,608 10% 39% Minor 6% 4,170 9% 28% Moderate 5% 3,571 9% 37% Major 9% 15,574 16% 31%

ANALYZING THE DIFFERENCES IN FRESHWATER AND STORM-SURGE DOLLAR LOSSES FROM THESE EVENTS

Existing evidence On Flood Insurance Claim Losses Wharton Risk Center analysis (Kousky and Michel-Kerjan, 2015) 35 years of NFIP claim data, Jan 1978-Dec 2012 Over 1 million single-family residential claims across all 50 states Years Mean Paid Claim Median Paid Claim Number of paid claims 1980-2012 $34,478 $12,555 1,119,274 2000-2009 $54,506 $21,740 456,255 2005 $91,911 $72,887 177,100 2012 $34,080 $20,000 105,434 http://opim.wharton.upenn.edu/risk/library//zalliance-why-individuals-lack-flood-protection_ib2015.pdf But no distinction between coastal and freshwater flooding

Terminology Surge claim: caused by storm surge/velocity flow tidal water overflow (note, excluded from freshwater claim analysis) Freshwater claim: claims associated with overflow from a stream, river, or lake and claims associated with accumulation of rainfall or snowmelt. [these can be in coastal areas] Flood zones A: Special Flood Hazard Area (SFHA) subject to rising waters V: Special Flood Hazard Area (SFHA) - subject to wave velocity X: outside of the Special Flood Hazard Area (Non-SFHA) Closed vs. open claims Paid claims vs. damage (replacement cost) Note - we decided to exclude Katrina & many of the claims from Sandy were still open

Summary of Paid Claims & Damage Paid claims Damage Number of claims Surge (36%) (32%) Freshwater (64%) (68%) Total 231,724 223,183 Amount Surge (38%) (49%) Freshwater (62%) (51%) Total $6.826B $15.919B Average amount Surge $31,320 $108,972 Freshwater $28,417 $53,455 Overall $32,978 $71,330 For Hurricane Harvey, the NFIP has received more than 87,000 claims and incurred more than $819 million in losses as of September 26. [$9,413 per claim] https://www.verisk.com/press-releases/2017/october/pcs-and-nfip-to-report-aggregate-flood-loss-estimates/

Surge claims concentrated in a handful of storms 28

A: Special Flood Hazard Area (SFHA) subject to rising waters V: Special Flood Hazard Area (SFHA) - subject to wave velocity X: outside of the Special Flood Hazard Area (Non-SFHA) Freshwater claims: inland vs. coastal areas 29

A: Special Flood Hazard Area (SFHA) subject to rising waters V: Special Flood Hazard Area (SFHA) - subject to wave velocity X: outside of the Special Flood Hazard Area (Non-SFHA) Surge claims: SFHA vs. Non-SFHA 30

Boxplot of freshwater depthdamage ratio by depth, coastal (C) and inland (I) Boxplot of surge depth-damage ratio by flood zone

Depth-damage ratios with USACE depth-damage curve

33 Covariate Surge Freshwater A zone property (+) *** V zone property (+) *** PreFIRM property (+) *** (+) *** Repetitive Loss property (+)* (+) *** Elevated structure (-) *** (-) *** Multi-story structure (-) *** (-) *** Structure with basement (-) *** (-) *** Structure replacement cost value (ln) (+) *** (+) *** Community population (in 100,000s) (+) *** (+) *** Community pct. Impervious surface (-) *** (-) *** Flood depth (+) *** (+) *** Property located 0 to 25 mi. from coast (+) *** Property located 100 to 500 mi. from coast Year (+) *** Gulf coast (+) *** (+) *** Florida (+) *** (-) *** Southeast (-) *** (-) *** Northeast (-) *** (-) ***

34 Key Points: Freshwater flooding a significant component of U.S. TC risk In both coastal and inland areas Roughly 2/3 of the number of claims, and ½ of the resulting damage Freshwater vs. Surge Dollar Losses While average paid claim amounts are comparable, average damage for surge claims is roughly two times greater Losses increase by flood depth more significantly for storm surge claims Improved risk assessment needs Storm surge risk significant outside V-zones Depth-damage functions may need more calibration at higher flood depth levels

35 Research next steps: Fine-tune modeling for individual events Based on the available rainfall forecasts, development of a forecasting system that would forecast insurance claims and losses. The lead time would range between 6 hours and five days.

Last but not least - what can we do to reduce the risk? Flood Resilient Communities Measuring resilience in over 100 communities globally Financial, human, natural, physical, and social capital Role of mitigation Community rating system of the NFIP flood insurance premium rates are discounted to reflect the reduced flood risk resulting from the community actions Enhanced building codes demonstrate the economic effectiveness of statewide wind code in Florida Improve communication of the risk - make the risks facing individuals, firms and communities more transparent and to encourage them to invest in protective measures prior rather than after a disaster

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