New opportunities arise for risk capital providers and city planners as the resilience movement gets analytical. EXPOSURE explores the potential.

A hundred years ago, a seven-and-a-half-mile seawall was built to protect San Francisco from Mother Nature. It gave the city’s planning department the confidence to develop today’s commercially and culturally rich downtown.

But that iconic waterfront is under threat. The aging seawall has serious seismic vulnerability. Almost $80 billion of San Francisco property is exposed to sea level rise.

To ensure his city’s long-term resilience, Mayor Ed Lee commissioned a plan to design and fund the rebuild of the seawall. A cost of $8 million for the feasibility study last year and $40 million for the preliminary design this year is just the beginning. With an estimated price tag of up to $5 billion, the stakes are high. Getting it wrong is not an option. But getting it right won’t be easy.

San Francisco is no outlier. Investing in resilience is in vogue. Citizens expect their city officials to understand the risks faced and deal with them. The science is there, so citizens want to see their city planning and investing for a robust, resilient city looking fifty or a hundred years ahead. The frequency and severity of natural catastrophes continues to rise. The threat of terror continues to evolve. Reducing damage and disruption when the worst happens has become an imperative across the political spectrum.

Uncertainty around various macro trends complicates the narrative: sea level rise, coastal development, urban densification, fiscal constraints, “disaster deductibles.” Careful planning is required. An informed understanding of how the right intervention leads to a meaningful reduction in risk is higher than ever before on the City Hall agenda.

This has various implications for risk capital providers. Opportunities are emerging to write more profitable business in catastrophe-exposed areas. Municipal buyers are looking for new products that link risk transfer and risk reduction or deliver more than just cash when disaster strikes.

The innovators will win, thinks John Seo, co-founder and managing principal of Fermat Capital Management. “Considerable time and thought must be invested on what to do with funds, both pre- and post-event.

“All municipalities function on a relatively fixed annual budget. Risk transfer smooths the costs of catastrophe risk, which lessens the disruption on ongoing spending and programs. Ideally, risk transfer comes with a plan for what to do with the funds received from a risk transfer payout. That plan is just as valuable, if not more valuable, than the payout itself.”

Resisting a shock in New Orleans

This innovative approach to resilience has become central to New Orleans under Mayor Mitch Landrieu. Partnering with utilities and reinsurance experts, the city examined its drinking water, sanitation and rainwater evacuation facilities to determine their vulnerability to major storms. This analysis provided the basis for investments to ensure these facilities could withstand a shock and continue operating effectively.

“In New Orleans, the city’s pumps are a critical piece of infrastructure. So, the question was: can you create a better nexus between an engineering company with manpower and thought-power to help keep those pumps going, to prepare them in advance of a catastrophe, and align insurance contracts and risk so we are continuing service delivery,” explains Elizabeth Yee, vice president of city solutions at 100 Resilient Cities.

The aim is to focus on disaster response and business continuity, in addition to risk financing. “If there’s an earthquake it’s great the city might receive $10 million to help repair the airport, but what they really need is an airport that is up and running, not just $10 million,” says Yee. “So, there needs to be a way to structure insurance contracts so they better help continue service delivery, as opposed to just providing money.”

There is also the need to reflect the impact of strengthened infrastructure when modeling and pricing the risk. But this isn’t always an easy journey.

In the city of Miami Beach, Mayor Philip Levine decided to raise its roads, so the barrier island’s thoroughfares stay open even in a flood. While the roads remain dry, this intervention has brought some unwelcome consequences.

City residents and business owners are concerned that the runoff will flood adjacent properties. Irrespective of where the water from the streets goes, it is no longer clear whether in-force insurance policies would pay out in the event of flood damage. The ground floor is no longer technically the ground floor. It is now a basement as it sits below the street level which one local restaurateur found out when Allstate denied his $15,000 claim last year.

“That’s an example of the kind of highly nuanced problem government agencies are grappling with all over the world,” explains Daniel Stander, global managing director at RMS. “There are often no quick and easy answers. Economic analysis is essential. Get it wrong and well-intentioned intervention can actually increase the risk — and the cost of insurance with it.

“The interventions you put in place have to reduce the risk in the eyes of the market,” he continues. “If you want to get the credit for your resilience investments, you need to make sure you understand your risk as the market does, and then reduce your risk in its eyes. Get it right, and communities and economies thrive. Get it wrong, and whole neighborhoods become uninsurable, unaffordable, unlivable.”

Retrofitting shelters in Berkeley

Through its partnership with 100 Resilient Cities, RMS is helping a growing number of cities determine which resilience interventions will make the biggest difference.

Knowing that a major Hayward fault rupture would displace up to 12,000 households, with up to 4,000 seeking temporary shelter, the city of Berkeley engaged RMS to ascertain whether the city’s earthquake shelters would withstand the most probable events on the fault. A citywide analysis highlighted that the shelters perform, on average, worse than the surrounding buildings from which residents would flee. The RMS analysis also found that a $17 million seismic retrofit investment plan is substantially more cost-effective and environmentally friendly than rebuilding or repairing structures after an earthquake.

“We’ve encouraged our chief resilience officers who are new to a city to learn about their exposures,” explains Yee. “From that baseline understanding, they can then work with someone like RMS to carry out more specific analysis. The work that RMS did with Berkeley helped them to better understand the economic risk posed by an earthquake, and ensured the city was able to secure funding to upgrade earthquake shelters for its residents.”

Rewarding resilience

In parts of the world where the state or national government acts as (re)insurer-of-last-resort, stepping in to cover the cost of a catastrophe, there may be a lack of incentive to improve city resilience, warns Yee. “Many of the residents in my neighbourhood have elevated our homes, because we had fish in our yards after Hurricane Sandy,” she says. “But some of our neighbours have decided to wait until the ‘next one’ because there’s this attitude that FEMA (the Federal Emergency Management Agency) will just pay them back for any damage that occurs. We need to change the regulatory framework so that good behavior is incentivized and rewarded.”

“You don’t have to go to emerging markets to find plenty of exposure that is not covered by insurance”— Daniel Stander, RMS

In the U.S., FEMA has suggested the introduction of a “disaster deductible.” This would require recipients of FEMA public assistance funds to expend a predetermined amount of their own funds on emergency management and disaster costs before they receive federal funding. Critically, it is hoped the proposed disaster deductible could “incentivize risk reduction efforts, mitigate future disaster impacts and lower overall recovery costs.”

City resilience framework

The City Resilience Framework, developed by Arup with support from the Rockefeller Foundation, helps clarify the primary factors contributing to resilient cities.  

Resilient cities are more insurable cities, points out Stander. “There are constraints on how much risk can be underwritten by the market in a given city or county. Those constraints bite hardest in high-hazard, high-exposure locations.”

“So, despite an overcapitalized market, there is significant underinsurance,” explains Stander. “You don’t have to go to emerging markets to find plenty of exposure that is not covered by insurance.”

Insurers need not fear that cities’ resilience investments will be to the detriment of premium income. “The insurance industry wants risk to be at an appropriate level,” says Stander. “There are parts of the world where the risk is so high, the industry is rightly reluctant to touch it. Informal neighborhoods throughout South America and South Asia are so poorly constructed they’re practically uninsurable. The insurance industry likes resilience interventions that keep risk insurable at a rate which is both affordable and profitable.”

“Besides, it’s not like you can suddenly make Miami zero-risk,” he adds. “But what you can do as a custodian of a city’s economy is prioritize and communicate resilience interventions that simultaneously reduce rates for citizens and attract private insurance markets. And as a capital provider you can structure products that reward resilient thinking, which help cities monetize their investments in resilience.”

Movements like Rockefeller Foundation‒pioneered 100 Resilient Cities are both responding to and driving this urgency. There is a real and present need for action to meet growing threats.

In San Francisco, investments in resilience are being made now. The city is beyond strategy formulation and on to implementation mode. Shovel-ready projects are required to stem the impacts of 66 inches of sea level rise by 2100. For San Francisco and hundreds of cities and regions around the globe, resilience is a serious business.


Quantifying the economic impact of sea level rise in San Francisco 

In May 2016, RMS published the findings of an analysis into the likely economic impact of sea level rise (SLR) in San Francisco, with the aim to inform the city’s action plan. It found that by the year 2100, $77 billion of property would be at risk from a one-in-100-year extreme storm surge event and that $55 billion of property in low-lying coastal zones could be permanently inundated in the absence of intervention.
The city’s Sea Level Rise Action Plan, which incorporated RMS findings, enabled San Francisco’s mayor to invest $8 million in assessing the feasibility of retrofitting the city’s seawall. The city subsequently commissioned a $40 million contract to design that retrofit program.