Investing in Canada's Future: The Cost of Climate Adaptation - does infrastructure spending recommended in a new report for by IBC for FCM make sense?

Investing in Canada's Future: The Cost of Climate Adaptation,
Report by IBC and FCM, September 2019 

A new report by the Insurance Bureau of Canada attempts to answer an important question: How much should we invest in adaptation measures to prevent effects of climate change?

The report summary "Investing in Canada's Future: The Cost of Climate Adaptation" (link) suggests the following:

"The analysis determined that an average annual investment in municipal infrastructure and local adaptation measures of $5.3 billion is needed to adapt to climate change. In national terms, this represents an annual expenditure of 0.26% of GDP."

"Flood, erosion and permafrost melt are associated with the highest cost to GDP ratios at 1.25, 0.12 and 0.37, respectively. These climate risks require the greatest investment in adaptation."

The infographic summary (link) suggests that " the benefits of investing in community adaptation and resilience outweigh the cost of such investments by a ratio of 6 to 1".

Let's review this in terms of mitigation of flood damages.

The annual expected insured losses from hydrologic and meteorologic events in Canada is $0.7B based on Munich Re data.  Overall losses are $1.27B considering Munich Re ratios.  Over 100 years that some infrastructure lasts, that is $127B in losses, some that can be effectively mitigated or deferred.  If there is a 6:1 benefit:cost ratio to adaptation efforts, then spending $127B/6 = $21.2B would be the cost of the adaptation program to 'break even' (let's assume that is the capital cost and not operation and maintenance).

The IBC FCM study suggests spending of $5.3B per year - a lot more than the 'break even' number -and notes "What is needed now is an ambitious and long-term investment plan for disaster mitigation and adaptation charted along a time frame of not year-to-year, but for the next twenty years or longer."

Let's look at the numbers.

If we invest $5.3B per year for 20 years, that is $106B. So that is a benefit:cost ratio of $127B:$106B or 1:2:1.  If we invest $5.3B a year for 25 years, the cost exceeds the benefits.  That investment is a lot higher than what we would expect if we achieved a 6:1 benefit:cost ratio, spending only $21.2B.

If we consider that losses cannot be completely deferred with adaptation (as it is rarely 100% effective, and there may always be events that exceed design capacity leaving residual damages, and overall losses cannot be completely deferred), the potential benefits over 100 years may be only $70B, assuming all insured losses can be mitigated.  That means spending $5.3B a year for 20 years, or $106B will cost more than the benefits.

This should be carefully reviewed.  The value of all municipal storm and wastewater and bridge infrastructure in Canada is $418 B (see my 2018 CWWA presentation here). So investing $106B, or 25% of the value of all that infrastructure value is a lot.  Some municipality flood mitigation programs has been estimated at only 6% of asset value.

Setting investment levels appropriately is important and further analysis is needed.  It would also be worthwhile distinguishing between the cost to address today's infrastructure capacity and land use planning risks and future risks.  Much of Canada's current $0.7B in damages is due to existing level of service deficiencies and not future climate effects.

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In a previous study Green Analytics acknowledged the difference between damages due to economic growth and those due to future climate effects.  It would be worth looking at effects of future growth on damages and consider those in assessing infrastructure investment requirements.

Financial Post Identifies Gaps in Insurance Industry Statements on Extreme Rain Causes, Flood Losses Trends, and Effective Mitigation Strategies

Terence Corcoran's article today covers a lot of the science and engineering that cityfloodmap.com has been exploring and promoting over the past few years. It is great to see many of our findings reflected in the mainstream media now. Wow!

Terence Corcoran is a National Post columnist and one of Canada's leading business writers and editors and he has been writing on the insurance industry, climate change and flooding for a couple decades. In his article today he explores the topics of:

1. Catasrophic loss trends, including flooding and the effects of GDP growth on trends as well as the influence of different data sets - we have explored that extensively in a previous post suggesting loss trends are not increasing as dramatically as the media suggests.

2. Green infrastructure implementation costs - we showed that those are prohibitive as in a previous post looking at Ontario-wide implementation city-by-city, and then again when looking at Ontario-wide lifecycle cost in another post.

3. Green infrastructure can make flooding worse - that is due to infiltration into already stressed wastewater systems as noted by the US Transportation Research Board, WEAO, and Ontario and US cities and local experts, as noted in a previous post.

4. Green infrastructure has questionable cost efficiencies as we see in a Metrolinx 'green' parking lot that is actually benefiting from a 'grey' traditional engineered stormwater detention tank- we have further shown that traditional grey engineered infrastructure has a better return on investment than green infrastructure as assessed in a detailed Class EA study and through a city-wide technology review benefit/cost analysis summarized in this post.

5. Green infrastructure and natural infrastructure does not reduce flood damages - contrary to what is promoted by the insurance industry like in the recent IBC report - it does not reduce flood damages according to the Ontario Society of Professional Engineers, and cannot cost-effectively reduce US river flood damages as described in this post.

6. Storms are not more frequent or intense due to climate change, and the insurance industry has made up "Insurance Fact" statements that has been rejected by insurance companies as reliable advertising - this was explored in a previous post and in our paper in the Journal of Water Management Modeling called "Evidence Based Policy Gaps in Water Resources: Thinking Fast and Slow on Floods and Flow"; https://www.chijournal.org/C449

Thank you Terence Corcoran for helping to shed light on these topics!

Flooded Basement Cost in Canada - How Dwelling Size and Regional Differences Affect Cost Benefit Analysis and Return on Investment in Flood Risk Remediation Strategies

Flooded basements dominate natural hazard damages in many parts of Canada. The cost to lower flood risk varies considerably from several hundred to a few thousand dollars for simple lot-level best management practices, up to many tens of thousands of dollars per home for significant and complex infrastructure upgrades. Cost Benefit Analysis (CBA) can help guide what scale of risk reduction investment is appropriate given the implementation cost and the long term benefits of deferred damages over the lifecycle of the investment.  While CBA is uncommon in traditional municipal infrastructure planning, it has been applied in the past to identify municipal flood infrastructure priorities and is now a requirement for large scale projects under the new Disaster Mitigation Adaptation Fund. This blog post explores basement flood cost estimates that may be used to in CBA to help develop flood mitigation strategies and prioritize cost-effective best practices, programs and projects that deliver timely risk reduction.

The Insurance Bureau of Canada (IBC) has identified the cost of a flooded basement in Canada to be $40,000 - this has been described as an "average cost". This is an important number in CBA since it drives the value of deferred damages associated with flood risk reduction best practices.  A recent report "Blueprints for Action, Minimizing Homeowner Flood Risk in the GTHA"
(July 2017) prepared by Civic Action, IBC, and the  Intact Centre on Climate Adaptation indicates that value reflects damages for two particular flood events, the including the Toronto area July 8, 2013 storm and the 2013 flooding in Alberta, which included extensive river flooding - the report indicates "Combined with flooding in Alberta that same year, affected homeowners faced
a $40,000 repair bill on average." and " The average cost of repairing basements damaged by flooding in Alberta and Toronto in 2013 was more than $40,000 for each affected homeowner." citing a CBC news article in which the Intact Centre on Climate Adaptation indicates "The average cost of restoring water-logged basements in Alberta and Toronto in 2013 was more than $40,000 for each homeowner".

Correspondence with IBC suggests the value of $40,000 reflects Greater Toronto Area (GTA) costs for 2013 flooding, and not Alberta basements as noted in the Blueprints for Action report, and that values have been 'rounded up'. IBC also noted Intact Centre on Climate Adaptation relies upon US data in Forbes: "More specifically, according to the National Flood Insurance Program in the United States, a 15-centimeter flood in a 2,000-square-foot home is likely to cause about $40,000 in damage”  (Flood Insurance: Protection Against Storm Surge. 2012).

Let's review this basement damage cost and also consider how it can be used in cost benefit analysis that must take into account the frequency of these damages, that is, the return period or probability of such damages occurring.

First, what geography does the $40,000 damage value apply to? That is unclear and seems to grow over time:
i) The July 2017 Blueprint for Action report suggests it applies to the Toronto area and Alberta,
ii) A May 2017 Global News article suggests it applies to all major cities according the the Intact Centre on Climate Adaptation: "A flooded basement costs an average of $42,000 in major cities",
iii) A 2018 infographic by the Intact Centre on Climate Adaptation suggests that it applies more broadly to basements across Canada, not just major cities,

iv) Intact Centre on Climate Adaptation's presentation to the Standing Senate Committee on Energy, the Environment and Natural Resources Issue No. 38 - Evidence - February 8, 2018 (see transcript) notes "This is very problematic, because the average cost of a flooded basement in the country right now, in urban and rural areas, is about $43,000.", expanding the damage estimate of "about" $43,000 to include rural areas too.
v) Shortly after the Intact Centre on Climate Adaptation appears to firm up the estimate on TVO's The Agenda, Assessing Ontario's Flood Risks, March 23, 2018 (see transcript) and notes "It's highly problematic. The average cost of a flooded basement in Canada right now is $43,000."

So the estimate has changed from characterizing Toronto and Alberta flooding in 2013 extreme events to applying to "major cities", then more widely to "urban and rural areas", and has changed from an estimate to a more definitive "average cost" across Canada.

How do the flooded basement damage values compare to other sources?

KPMG's report "Water Damage Risk and Canadian Property Insurance Pricing" (2014) for the Canadian Institute of Actuaries summarizes water damage trends from Aviva Canada:

"In a media release dated April 10, 2013, Aviva stated: Approximately 40 per cent of all home insurance claims are the result of water damage . . . and the average cost of water damage claims rose 117%, from $7,192 in 2002 to over $15,500 in 2012, a year in which the company
paid out over $111 million in property water damage claims. (source)

An older media release in early 2011 also highlights the concern: “Aviva Canada’s data found that
in 2000, the average cost of a water damage claim was $5,423. In 2010, it was over $14,000 – an
increase of nearly 160 percent”. (source)"

Aviva Canada has also commented that average flooded basement costs has increased in a Canadian Underwriter article stating "The average cost per residential water damage claim has increased significantly – going from $11,709 in 2004 to $16,070 in 2014, a 37% increase.". These values may reflect damages in years that did not have widespread record-breaking flood events like 2013, characteristic of more average or typical low-flooding years.

So average water damage claims at Aviva Canada have been given as:

$5,423 in 2000
$7,192 in 2002
$11,709 in 2004
over $14,000 in 2010
over $15,500 in 2012, and
$16,070 in 2014.

Why are 2013 claims cited by IBC so high? The KPMG report offers some insight:

"... good practice for property pricing requires that actuaries have the ability to link claims data with detailed exposure data. Thus, actuaries require accurate cause of-loss coding for all property claims. This coding is particularly important following the occurrence of major events such as the Alberta and Toronto floods of 2013. Many losses arising from the Alberta floods, in particular, were covered by insurers as a goodwill measure and to enhance the long-term relationship with customers and not because the peril of water damage was covered in the insureds’ policies."

So 2013 damage values include perils that were not covered, e.g., overland flooding. Why else are 2013 claims cited by IBC so high? Because of the severity of the 2013 storm event in the GTA. The chart below shows 3-hour rainfall totals in comparison to return period totals in west Toronto and Mississauga. The Gauge 1, 2 and 3 3-hour rainfall depths of 138 mm, 121 mm and 96 mm were identified by Toronto Water in a ICLR Friday Forum workshop February 19, 2016 entitled 'Reducing flood risk in Toronto' - see slide 19 in the presentation.

July 8, 2013 Extreme Rainfall Frequency Analysis and Comparison to Design Rainfall Intensities

An excerpt from the Toronto Water presentation is shown to the right showing the location of the 3 gauges that recorded over 100-year storm amounts.

IDF data for the Toronto City (Bloor Street) gauge are used in the frequency analysis chart above. The version 2.3 datasets with 61 years of record have been extended to include 2017 data obtained from Environment and Climate Change Canada, extending the record to 70 years. Frequency analysis on the extended dataset using a the Gumbel distribution was completed by the City of Markham who uses this gauge in its stormwater management and engineering design guidelines and standards. Frequency analysis was also extended for the Pearson Airport gauge. A summary table showing the updated IDF values, including the 3-hour duration rainfall depths in the chart is shown below.

For large portions of the GTA where flooding was concentrated, the observed rainfall amount exceeded the 100-year design rainfall and at two rain gauges even exceeded the 2000-year (not 200, 2000!) rainfall statistic. So 2013 was certainly not an average year for basement flooding.

Another reason that the IBC flood damage value may be so high is that it has been vetted by comparing to much larger homes in the US. While the damage for a 2000 square foot home in the US may equate to $40,000, the most flood-prone homes in Canada are much smaller. Most flooding in Canadian cities occurs in older subdivisions build before modern drainage and wastewater servicing design practices, in general, before 1980 - a previous post shows this quantitatively. A Globe and Mail article quotes M Hanson Advisers, a U.S. research firm that caters to institutional investors, indicating "In 1975, the average size of a house in Canada was 1,050 square feet." - this is about half of the comparative house size used to vet the $40,000 damage estimate. The average claim-count-weighted US flood damage is much higher than the Canadian average event claims, perhaps reflecting the severe nature of hurricane event damage as explored in a previous post that evaluated FEMA flood damage payouts - our analysis generated inflation-adjusted claim-count-weighted average payout of $60,600, considering 116 events between 1978 and 2017.

So IBC has identified a 'rounded-up' basement flood damage cost associated with a very extreme rainfall event in the GTA and that considers extensive riverine flooding in Alberta where payouts appear to have been for uninsured perils as a means of goodwill and client retention. The Aviva Canada reported average claims suggest a lower water damage amount in average years without the unique 2013 considerations in the GTA and Alberta.

What flooded basement damage amount should be considered in deriving deferred damage benefits and in return on investment (ROI) calculations for flood remediation projects? Yes, that was how this post started. Such calculations can take two approaches, one a top-down aggregation approach to guide long-term flood remediation program spending, and another bottom-up property-by-property approach at that recognizes variability in individual property risk.

Stay tuned for our economic model of flood damages and remediation strategies!

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New - CBC Ombudsman reviews $43,000 value and finds it is not an average but based on one extreme, unique flood event in Toronto in 2013 (July 8, 2013) - see post: https://www.cityfloodmap.com/2019/09/assessing-damage-cbc-ombudsman-finds.html

Economics of Flood Damage Claims - Large Events Dominate Overall Losses - Should Effective Mitigation Strategies Focus On "The Big Ones"

What type of meteorologic events dominate flood damage claims? Is it from many frequent small storms or a few infrequent black-swan events? Understanding what size of events cause the most losses can help us focus on the most effective flood loss mitigation measures - this is essential for achieving high returns on investment in flood mitigation strategies. By reducing flood losses in an economically efficient manner, high benefit-cost ratios can be achieved.

This post summarizes the distribution of FEMA's flood damage claims and explores what type of storm events - big or small - govern extreme weather losses.

FEMA summarizes the number of payout claims and the total value of payouts for significant flood events, i.e., those with 1500 or more payouts. The total value of payouts, adjusted for inflation to 2018 dollars, is plotted below against the total number of claims in the events between 1978 and 2017:

FEMA Average Claim Amount for Various Event Sizes (Number of Claims) - Small Significant Flood Events with a Minimum of 1500 Claims Per Event

The median number of payouts is 4115 with a median payout amount of $29,700, adjusted to 2018 dollars. This is over a total of 116 flood events from 1978 to 2017.

Larger storm result in more extensive flood damages and numbers of payout claims as shown on the following chart that labels some of the largest tropical storm / hurricane events:

FEMA Average Claim Amount for Various Event Sizes (Number of Claims) - Small and Large Significant Flood Events with a Minimum of 1500 Claims Per Event

How do the larger events affect the flood damage and payout values? The average flood claim payout of $36,200 is above the median value reflecting the skew in catastrophic event distribution - the right tail of rare black-swan events in the probability distribution of events pulls the average above the median.

Five of the 116 event have claim counts that are over ten to forty times the median number of claims. That is, Hurricane Ike and Irene had over 40,000 claims compared to the median count of just over 4000 claims. And Hurricane Harvey had over 160,000 claims. The losses are greater for these larger events with the best-fit line showing average claim values of over $50,000 to over $120,000 for these largest significant events. What effect do these claim counts have on weighted claim amount - they increase the claim-count-weighted average loss to $60,600 - more than double the median claim amount per event that is not weighted by the number of claims in each event.

So when looking at the economic losses associated with a significant flood event, we need to consider the size of the event. And when we develop strategies and best practices for flood resilient communities and flood risk mitigation, striving for significant damage reduction and return on investment in averted flood damage losses, we must also consider what events cause the most damages. Canada's Disaster Mitigation and Adaptation Fund (DMAF), for example, requires return on investment (ROI) evaluations for eligible risk reduction projects. It would appear that to achieve meaningful flood damage reduction ROI we must target solutions toward events leading to the most damages

Looking at FEMA's significant flood events, data show that 3 of 116 events account for 54% of the total inflation-adjusted damages. Those 3 events are Hurricane Harvey, Superstorm Sandy and Hurricane Katrina. And the top 20 events, each with total event claims of over $500M, account for 81% of the total claims. So it is clear that to reduce the bulk of flood damages we have to consider how to increase resiliency in existing communities during the largest storm events. If we target flood risk reduction for the small catastrophic events, the smaller 97 events, we will be addressing only 20% of the total claim value. So the 80/20 rule, the Pareto principle, does apply to flood damage reduction.

FEMA Inflation Adjusted Significant Flood Event Payout Distribution - Pareto Distribution and the 80/20 Rule

The impact on a few recent large events on damages helps show sample-bias in catastrophic event losses as explored in a previous post. That is, up to 2004 prior to Hurricane Katrina, the distribution of losses based on the 1978-2004 sample of events did not consider the true 'population' distribution of flood events that includes very extreme, right-tail events. As Fleming demonstrated in "Yep, We're Skewed", short samples with high skew underestimate losses of the true population of events.

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For statistics geeks:

Could it be that the common chorus of explaining recent floods losses as being due to climate change may in fact be explained simply by statistics and larger sample sizes overcoming short sample biases (underestimation)?

Could it be that growth in high risk areas is driving flood damages higher? AON Benfield's review of Hurricane Harvey suggests that growth in at-risk areas explains some flood impacts:

 "Given the volume of water, local infrastructure across southeast Texas was simply unable to handle such an enormous amount of rainfall in a short amount of time. This led to major water run-off that quickly accumulated across a very large area. With so much residential and commercial growth throughout this part of the state – combined with abundant concrete and poor absorbing clay soil –this only worsened the flood impact."

Solutions to flood risk mitigation therefore cannot only be local infrastructure solutions to convey enormous amounts of water but rather land use planning policies to direct development and redevelopment away from high flood risk areas. As AON Benfield notes " Hurricane Harvey’s rainfall reached the 1,000-year rainfall return period based on many time intervals during the course of a number of hours and days.", and it is not cost effective, or technically feasible, to have local infrastructure convey the runoff from events of this magnitude.

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Canada Connection (for those appreciate tree-sauce, skatey-punchy, and noble antler cows):

CatIQ claim datasets have been used to evaluate flood damages across Canada according to the size of the flood event (i.e., related to the number of claims). A similar pattern of increasing damages with increasing event size and distribution is apparent in the CatIQ datasets. In contrast to the FEMA claims noted above for many hurricane events, the CatIQ data reflect basement flooding claims primarily, as overland flooding has not been insured in the past and is not widely held. What is the magnitude of these Canadian claims? Aviva Canada provided this summary of claim trends and magnitude:

"In 2014, water damage claims accounted for 44% of dollars paid out on all Aviva Canada property damage claims, compared with 39% in 2004. The average cost per residential water damage claim has increased significantly – going from $11,709 in 2004 to $16,070 in 2014, a 37% increase."

So basement flooding damages are significantly less than FEMA's large scale catastrophe claims. CatIQ data shows that for larger events (those with higher claim counts) the average claim amount does increase above the Aviva Canada values noted above. Comprehensive benefit-cost analysis used to develop ROI rankings for flood mitigation projects would apply the lower range of typical damages to frequent to moderate events and the higher damages/claim amounts to the frequent events, factored by their probabilities. The most frequent storms, typically 5 to 10 year return period events as in a recent study by Atkins for the US EPA do not generate damages.