nj future forum 2012 flooding linkin

Flood Risk in New Jersey:

Thoughts from an Insurance Expert

Megan E. Linkin, Ph.D.

Allianz Risk Transfer

March 9th, 2012

Disclaimer

The information contained in this presentation is of a general nature and is intended for the recipient only

as generalized information. This presentation is not intended as, and shall not be interpreted as, (i) an

incentive or offer to buy or sell (re)insurance products or other financial instruments in any jurisdiction

where, or to any party to whom, the offer or distribution of such products is not allowed, (ii) an offer to

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© Copyright Allianz 3/15/2012 2

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Weather and its Economic ImpactUnited States

All 11 non-governmental sectors

of US economy are sensitive to

weather variability

US economic output varies as

much as 3.4% of the 2008 gross

domestic product (GDP; $485

billion) as a direct result of weather

variability

NOAA estimates $2.65 trillion, or

25% of the US GDP, is impacted by

weather

Economic sensitivity of New

Jersey is 8-10% of gross state

product (GSP) due to weather

variability© Copyright Allianz 3/15/2012

Source: Lazo et al (2011)

New Jersey FloodsA Brief History

© Copyright Allianz 3/15/2012

Source: NWS, the Star Ledger, and the Associated Press

New Jersey FloodsBy the Numbers


On average, 1.5 flood events occur in New Jersey per year and the annual

average insured loss from flood events is $138 million (2012 USD), based on

PCS data between 1950 and 2012.

The return period for a $100 million (2012 USD) insured loss is 3 years.

Annual average loss since 1990 is $240 million (2012 USD), over $100 million

more than the long term mean.

0.00

0.40

0.80

1.20

1.60

2.00

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

20

12

as-

if l

oss

(U

SD)

Bill

ion

s

Year

New Jersey Flood Losses - 2012 as-if

2012 As-if Loss

Source: ISO PCS

The Current State of Flood InsuranceThe National Flood Insurance Program


Most private insurers do not cover flood losses due to the concern of adverse

selection.

In 1968, the US government created the National Flood Insurance Program to

help property owners obtain flood insurance to offset requests for disaster

funding after large events.

Homeowners can participate in NFIP if the community adopts a floodplain

management program.

Since 1978, the NFIP has paid out over $38 million in claims, mostly in the

state of Louisiana.

Premiums are based on regularly updated flood insurance rate maps

(FIRMs), showing the 100-year flood boundary and the 500-year flood

boundary.

Vulnerability of the New York/New Jersey Metro

Region

Top 10 in population

vulnerable to coastal

flooding

Second only to Miami in

assets exposed to coastal

flooding

Second only to

Tokyo, Japan for assets

exposed to wind damage

BAU scenario: $2.5 trillion

in assets exposed to sea

level rise

© Copyright Allianz 3/15/2012 Source: OCED


Nightmare scenario: Borderline

Category 3/4 making landfall in

southern Ocean County

Economic/insured loss potential

2-3 times Hurricane Katrina

Source: AIR/III

Weather Events and Climate Change

Impossible to determine impact of

climate change on individual events

Recent publications suggest

decrease in overall hurricane

frequency and an increase in major

hurricane frequency


Source: GFDL

Future Projections


Source: NPCC

Risk Baseline 2020s 2050s 2080s

SLR -- +2-5 in +7-12 in +12-23 in

Rapid ice

melt

-- +5-10 in +19-29 in +41-55 in

Flood Insurance and Climate ChangeConsiderations in the Future


NFIP must begin to increase spatial resolution of FIRMs to develop more

accurate premium calculations.

Climate change scenarios should be included in FIRMs, even if the scenarios

do not immediately affect rate calculation.

Active participation by the private market to avoid exhausting NFIP reserves.

The private insurance industry, in addition to providing traditional

insurance, must develop alternative risk transfer products which can allow

municipalities and states to transfer flood risk to the financial markets.

To engage private sector, the government must deter development in highly

exposed areas, such as barrier islands and wetlands.

A real public-private partnership is necessary to prepare the state of New

Jersey economically for climate change.

Flood Insurance and Climate ChangeConsiderations in the Future


NFIP must begin to increase spatial resolution of FIRMs to develop more

accurate premium calculations.

Climate change scenarios should be included in FIRMs, even if the scenarios

do not immediately affect rate calculation.

Active participation by the private market to avoid exhausting NFIP reserves.

The private insurance industry, in addition to providing traditional

insurance, must develop alternative risk transfer products which can

allow municipalities and states to transfer flood risk to the financial

markets.

To engage private sector, the government must deter development in highly

exposed areas, such as barrier islands and wetlands.

A real public-private partnership is necessary to prepare the state of New

Jersey economically for climate change.

Alternative Risk Transfer ProductsExcessive Rainfall Cover

Index-based weather cover is a

simple and transparent financial

solution which allows for quick

settlement.

Station based weather

observations from a National

Weather Service weather station

are used to both price and settle

the contract.

Rainfall cover, using a monthly or

seasonal trigger, can provide

near-term financing to cope with

the economic stress of flooding.

Precedents exist (Alabama

SIF, CCRIF) where the public

sector has purchased alternative

risk transfer solutions to receive

quick funds during a post-disaster

period.


Weather Station Newark-Liberty International Airport

Dates Covered May 1 - September 30

Weather Variable Precipitation

Trigger (inches) 25.4

Tick ($/inch) 375,000

Limit 5,000,000

Rate on Line 10.01%

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0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

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11

Pay

ou

t (U

SD)

Mill

ion

s

Year

Historical Payout - KEWR Seasonal Precipitation Call Option

Payout

Alternative Risk Transfer ProductsCat-in-the-Box Transaction

A “cat-in-the-box” parametric

cover pays out after a natural

catastrophe exceeds a pre-

determined intensity in a defined

area.

Simple intensity

measurements, such as Saffir-

Simpson Scale for hurricanes or

the Modified Mercalli Intensity

Scale for earthquakes, are used

as triggers.

A third party, such as the

National Hurricane Center or

United States Geologic

Survey, reports intensity

measures, keeping the

transaction transparent.

Provides post-event financing

almost immediately after event.


Region Within 50 miles of New Jersey state borders

Intensity Trigger (Saffir-Simpson Scale) Category 1

Payout 10,000,000

Event Probability 6.17%

Rate on Line 12.35%

Source: NHC

Conclusions

Flooding is a significant driver of insured and economic loss in New

Jersey.

The most recent two decades have experienced above average flood

losses when compared to the long term

The current state of flood insurance is not fiscally responsible, and

does not delineate enough risk zones.

Climate change adds new challenges, by both altering the shape of the

coast line and impacting the frequency and severity of individual weather

events which cause severe flooding.

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