Flooding events are hitting many parts of the world, causing big infrastructure damage. But flooding can also have large indirect costs for the global economy. In a new report, CICERO analyses the total costs of four flooding events. An increasing share of costs are left uninsured, the authors warn.
To date, mosts analysts have been more concerned about water scarcity then flood risk. As flooding events become more extreme and more costly, at the same time that insurance coverage is shifting, we need to focus on the implications of flood risk.
The probability of flood risk is increasing with climate change, due to more intense and frequent extreme precipitation events. This may lead to coastal flooding, which can have significant impacts in combination with extreme weather and sea level rise, as we saw with recent hurricanes in the Atlantic Sea. While large coastal flood events may get the majority of attention, increasingly frequent water overflow or infiltration from heavy inland rain can have significant costs over time.
In the report "Flood Risk for Investors: Are You Prepared?", CICERO analyses the costs and insurance coverage for four different flooding events:
- Hurricane Harvey in Houston, 2017
- Superstorm Sandy in New York, 2012
- Copenhagen Cloudburst, 2011
- Regional flooding in Norway, 2012-2013
The four case studies show that the industry sector is most exposed to direct flooding risk. But also other economic sectors can be hit by flood, especially through indirect damage via transportation, communication and supply chain disruptions. Up to 50% of the total flood costs can result from electricity outages and transportation disruptions. Cities are especially vulnerable due to complicated infrastructure, yet flooding in rural areas can also have costly indirect impacts from transportation disruptions.
"Most surprising to us, was that more than half of the flood costs were not covered by insurance in the cases we reviewed for this report. Indirect costs such as electricity and transportation disruptions to business operations are not always covered by insurance," said Christa Clapp, Research Director for Climate Finance.
Investors and companies may not be able to rely on public policy or insurance to alleviate financial impact. A significant insurance protection gap exists and seems to be growing.
Further, the insurance system is poorly equipped to effectively handle large-scale flood events. National flood programs may not be able to handle increased severity of costs. Re-insurance companies have lost profit from extreme flooding events, raising questions about potential systemic risk in the insurance industry.
"Investors can learn a lot from these four different cases about potential vulnerabilities in other cities and regions. Before investing in assets and portfolios, they should ask questions about flooding preparedness," Clapp added.
The report suggest several ways for investors to engage on flood risk, via dialogue with companies and new investment opportunities.
- CICERO Climate Finance
- ClimINVEST - Tools for climate-resilient investment
- SUPER - SUb-daily Precipitation Extremes in highly-populated Regions
- Translating Weather Extremes into the Future – a case for Norway
- CiXPAG - Interaction of Climate Extremes, Air Pollution and Agro-ecosystems
- Natural and Anthropogenic influence on Precipitation and EXtreme events