Estimating the economic impact of climate change on national flood insurance

One of the industries where geospatial data and technology is having a major impact is insurance.

I blogged previously about a ground breaking risk assessment study of sea level rise in North Carolina.  The study modeled the financial impact on coast communities of the rise in sea level. resulting from global warming.  It makes it possible to estimate at the community level the financial losses associated with both long term sea level rise and episodic events such as storm surges.

More recently AECOM has been sponsored by the Federal Emergency Management Agency (FEMA) to analyze the potential long-term implications of climate change on the National Flood Insurance Program (NFIP) in the U.S.  The motivation for this study was a bill passed by Congress, the Flood Insurance Reform Act of 2012, which mandates a number of changes to the NFIP.  Key provisions of the legislation require the NFIP to raise rates to reflect true flood risk and to make the program more financially stable.

If a landowner's property is included in a Special Flood Hazard Area (SFHA) as defined by NFIP maps, it is mandatory for the landowner to have flood insurance.  The SFHA is the area what would be flooded by a "100-year flood", or in other words the flood having a one percent chance of being equaled or exceeded in any given year.  NFIP maps are available on-line and as paper and digital documents.

Projected impact of climate change

AECOM found that near rivers by the year 2100, the SFHA is projected on average to increase about 45% across the nation, with very wide regional variability.

In coastal environments AECOM projected changes based on two alternative assumptions.  In the fixed shoreline case, it is assumed that the shoreline does not change under the impact of rising sea level.  The alternative assumption is the receding shoreline assumption, that the shoreline recedes as sea level rises causing land to be lost to the sea. AECOM found that

• assuming a fixed shoreline the typical increase in SFHA is projected to be about 55% by the year 2100, also with very wide regional variability.
• with the receding shoreline assumption, negligible change in coastal SFHA is projected because the amount of new coastal SFHA resulting from rising sea levels will be equally offset by the land area lost to the sea.

AECOM estimated that the national average increase in SFHA by the year 2100 is 40% near rivers and coastal areas if shoreline recession is assumed; and 45% near rivers and coastal areas if fixed coastlines are assumed.

Impact with the receding coastline assumption

The estimated economic impact by 2100 is that the total number landowners required to have NFIP insurance policies will increase by approximately 80%.  This breaks down into a 100% increase in  landowners near rivers required to have NFIP policies and approximately a 60% increase in landowners in coastal environments.

AECOM also estimated that the average loss cost per policy will increase approximately 50% by the year 2100.

Impact with the fixed shoreline assumption

The estimated economic impact by 2100 is that the total number landowners required to have NFIP insurance policies is projected to increase by approximately 100%.  This breaks down into a 80% increase in  landowners near rivers required to have NFIP policies and approximately a 130% increase in landowners in coastal environments.

The estimated average loss cost per policy will increase by approximately 90% by the year 2100.

Technical background

The study relies on the findings and source materials of the U.S. Climate Change Science Program (CCSP) and the IPCC Fourth Assessment Report (IPCC AR4).

A probabilistic approach was used in which a range of climate changes was considered.  The key climate factors include both the frequency and the intensity of storms that influence flooding. Near rivers, intensity is determined by the amount of rainfall during storms.   In coastal areas, storm intensity is determined by wind velocity and pressures that produce storm surges.

The engineering analyses were based on IPCC AR4's three greenhouse gas emissions scenarios. These scenarios represent a balanced range between low and high climate change impact.

• The A1B scenario assumes balanced energy use between fossil fuel and non-fossil fuel energy sources, high economic growth and low population growth.
• The A2 scenario assumes a smaller amount of economic growth, but more rapid population change.
• The B1 scenario assumes low population growth and a more environmentally sustainable approach to economic growth.

River Flooding – changes in precipitation frequency and quantity as storms become more or less frequent, and more or less intense. River floods also depend upon the rate of runoff from a watershed.   Urbanization is an important factor because it increases the proportion of impervious surface area.

In coastal regions the important factors are gradual sea level rise (SLR) and the effects of storms.  Rising sea level increases the likelihood of greater long-term shoreline erosion and recession.  This is important because the projected effect is to move the coastal SFHA substantially inland by 2100. Depending upon the emissions scenario being considered, the global rise in sea level at 2100 is projected to average approximately 1.2 meters over the three emissions scenarios.

The engineering analysis was followed by a demographic analysis to determine the projected population, number of insurance policies, and related factors within flood hazard areas through 2100.