Flooding Projected to Cost Businesses $13.5B Next Year

A new report estimates that U.S. businesses could spend about $13.5 billion in 2022 to repair or replace flood-damaged commercial buildings.

The same report finds that businesses could lose more than 3.1 million days of operation from flooding next year

The report, titled “The 4th National Risk Assessment: Climbing Commercial Closures,” from the nonprofit First Street Foundation and global engineering firm Arup, provides insights for communities at risk of flooding. The report assesses the risk of flood damage to 3.6 million retail, office, and multi-unit residential properties across the country and related economic impacts. It identifies the economic impact to metropolitan areas and states from lost days of productivity and output caused by damage to retail and office buildings as well as the associated closures due to repair times. The report aggregates property-level data at the metro and state levels.

According to the report, a total of 729,699 retail, office, and multi-unit residential properties face risk of flood damage in the contiguous US.

The $13.5 billion annual costs to repair or replace damaged buildings could grow by roughly 25% to exceed $16.9 billion by 2052 due to climate change, the authors state.

The report notes that damage to commercial buildings has both revenue and downstream consequences for metropolitan areas and states. The annualized financial impact to local economies is expected to grow by 26.5% from $49.9 billion in 2022 to $63.1 billion in 2052.

“Commercial real estate supports the economic heart of American cities and multi-unit residential properties also play an important part in keeping the economy moving by housing members of America’s workforce, many of whom have had to work from home during the pandemic,” the report states.

“Business needs consistency and predictability in order to plan, invest, and grow their operations and allow communities to thrive,” said Matthew Eby, founder and executive director of First Street Foundation. But, he added, “American businesses and local economies face much more uncertainty and unpredictability when it comes to the potential impact of flooding on their bottom line than they may realize. Flooding that leads to lost days of operation and lengthy repair times for local businesses could have significant broader national and even global economic consequences.”

Ibbi Almufti, chair of Arup’s global working group on climate risk and resilience, said that as climate change accelerates, flood risk will pose an economic threat to more commercial and multi-residential properties across the country. Arup said the report provides an up-to-date understanding of flood risk to communities and can “embolden action” to mitigate the effects of climate change.

“The United States is ill-prepared for the extreme weather now becoming common due to our changing environment, evident by the flood cataclysms that wrought destruction to much of the country in the past decade,” the report said. “Impacts of extreme flooding exceed the speed American communities can fortify themselves. Identifying vulnerabilities at a local level is required to brace for climate extremes, preventing further destruction.”

Also, as extreme weather events become more frequent, the flood insurance picture is changing. FEMA has unveiled a new Risk Rating 2.0, which utilizes much more data to determine a property’s flood risk, well beyond the flood-zone-only approach. Some properties are expected to see a decrease in premiums, while others should see an increase, analysts have noted. New National Flood insurance Program (NFIP) policies sold after Oct. 1 are already subject to the new rating, while policies that renew after April 1 will be governed by the new approach.

Commercial Flood Insurance

At the same time as NFIP rating changes are going into effect, the country’s flood insurance market is slowly transitioning toward private insurers providing additional options to the federal government’s program, according to a new AM Best report.

Private sector carriers are being selective, tending to avoid risks in flood-prone areas and concentrating more on commercial properties than homeowners, an AM Best report shows.

According to Best’s Market Segment Report, “Appetite for Flood Risk Among Private Insurers Still Small,” more than 70% of overall private flood premium has been generated from commercial property exposures.

Also, the report finds that private insurers tend to avoid flood-prone areas, noting that Florida experiences tropical systems more frequently than any other state and represents about one third of the total NFIP insured value. Yet Florida represents only about a quarter of the total flood premium, partially illustrating the larger issue that the NFIP is subject to an inherent risk of adverse selection.

“If private insurers are able to price risks individually, they will cherry-pick the best risks with pricing better than the NFIP’s subsidized rates, leading to further adverse selection,” said Christopher Graham, senior industry analyst, AM Best.

The NFIP still bears the heaviest burden of the U.S. flood market, but private flood insurers generated almost $3.1 billion in total direct premium during 2016-2020. The $735 million in direct premium in 2020 represented the largest amount during that period.

Infrastructure at Risk

While more communities around the country have faced flooding in areas outside the Federal Emergency Management Agency’s 100-year flood zone, an earlier First Street report, “Infrastructure on the Brink,” shows that about 25% percent of U.S. critical infrastructure, including airports, hospitals, police stations, ports, power stations and roads, are at risk.

One takeaway is that even if a home or other structure escapes water damage, public services, utilities or health systems may be shut down or become inaccessible after a flood event.

Low-lying coastal areas, particularly those in Florida, Louisiana, Texas and New Jersey, are most vulnerable to the rising waters, according to First Street.

Of further concern is that outside the designated FEMA flood zones, only about 2% of U.S. properties have purchased flood insurance.

About the photo: A sign warns of high water on a flooded Interstate 75 at 7 Mile Road in Detroit on Saturday, June 26, 2021. (Max Ortiz/Detroit News via AP)