Canadian Underwriter

Risk management overhaul necessary for cities to become more resilient to catastrophic events: report

March 27, 2017   by Canadian Underwriter

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Officials for cities, investors and insurers will increasingly need to “build resilience within and between infrastructure systems as a complementary approach to address infrastructure risk and uncertainty,” argues a new report from Lloyd’s and Arup.

“While risk management remains a priority for cities, it is not enough on its own, or on an asset-by-asset basis,” concludes Future Cities: Building Infrastructure Resilience, released Friday by specialist insurance and reinsurance market Lloyd’s and global engineering consulting firm Arup.

“In order to better manage risk and recover quickly from future disasters, infrastructure owners and operators may need to move beyond asset-by-asset risk management to build resilience within, and between, infrastructure systems,” the report states.

“This requires consideration of how infrastructure performance might change when shock or stress events occur,” it suggests.

Related: Swiss Re, Veolia, The Rockefeller Foundation team up to help build cities’ resilience to critical risks

The research analyzes four different critical infrastructure systems – energy, water supply, information communications technology, and transport – through three case studies, demonstrating the impact of catastrophic events on infrastructure in the past and how stakeholders responded at the time.

Lloyd’s and Arup espouse a new approach that focuses on preventing failure, expediting recovery and transforming performance.

Meant to help municipal officials and insurers improve infrastructure resilience, the report details three new pathways to help guide planning, design, construction and operation of core city infrastructure. Specifically, the approaches are as follows:

  • prevent failure: make city infrastructure more resilient to shocks so that even if parts of it fail temporarily, the overall system still works;
  • expedite recovery: examine ways in which infrastructure can be restarted as quickly as possible post-disaster to save lives and prevent further failures; and
  • transform performance: replace the damaged infrastructure with a more resilient version as part of the rebuilding process.

“The rising costs of disasters is a growing concern for the public sector and the insurance industry alike; direct losses from disasters in the past decade are estimated at US$1.4 trillion,” notes the report.

Citing figures from the Lloyd’s City Risk Index, which found $4.6 trillion of the projected gross domestic product of 301 of the world’s leading cities is at risk from 18 threats over the next decade, the report adds that “clearly, cities will need to mitigate these risks if they are to realize their growth aims, but this is a complex task.”

Related: US$4.6 trillion of projected GDP at risk from 18 disasters in 301 global cities: Lloyd’s

Lloyd’s CFO John Parry maintains that the principles outlined in the report could substantially improve infrastructure resilience around the world.

“Most global population increases are expected to take place in cities that are more at risk from natural hazards, and cities, in general, are exposed to a greater diversity of risks than ever before,” Parry says.

“It is absolutely critical, therefore, that city officials, working with insurers and other stakeholders, act to improve city resilience,” he continues in the statement.

“In order to build resilience in cities, we need to understand the performance of the infrastructure that connects, provides and protects society,” suggests Samantha Stratton-Short, associate director of Arup.

“Disruption to one part of the system – utility and transport networks, communications systems and water supplies, for example – can cause failure in other parts, with far-reaching local and global implications,” the report cautions.

“Secondary and cascading impacts cannot be predicted through traditional approaches such as spatial risk assessment,” it contends.

Collective action can be taken by the insurance sector to work with stakeholders and build greater city resilience, notes the Lloyd’s statement. Action can be taken in the nine following areas:

  • improving data collection;
  • using this new data to quantify the risk and help inform stakeholder decision-making;
  • establishing metrics to enable the development of indices and models to assess resilience;
  • finding ways to incentivize investment by making resilience assessments available;
  • incentivizing policyholders to take risk mitigation measures through risk-based pricing;
  • developing collaborative models and tools that provide a transparent, comprehensive and accessible approach to analyzing and pricing risk;
  • encouraging the creation of indices that can be used by insurers to incorporate levels of resilience into the underwriting process;
  • creating shared understanding of how the components and stakeholders of cities interact and what the key areas and concerns are for each stakeholder; and
  • considering resilience services which draw on facilities management, disaster recovery, build and operate contracts and insurance.

Related: Businesses plan to “invest in resilience” in aftermath of Hurricane Matthew: FM Global

“Multiple factors build resilience and these should be measured and summarized by creating indices,” Trevor Maynard, head of innovation at Lloyd’s, says in the statement.

“This is essential to enable insurers better to incorporate levels of resilience into the underwriting process, which would then be expected to recognize and reward the action taken by city officials where risk-based pricing is permitted,” Maynard explains.

“It is in the interest of policyholders and governments to implement risk mitigation measures, thereby potentially reducing both the cost of insurance and the damage from natural catastrophes,” the report notes. “One way for the insurance industry to incentivize policyholders to introduce risk mitigation measures is through risk-based premiums,” it contends.

The report also cites the option of offering higher deductibles. “All things being equal, this reduces the costs of insurance, but leaves the policyholder exposed to more risk. They may, therefore, be incentivized to take action to reduce their residual risks.”

The hope is the new research will add to understanding of city resilience, stimulate new ideas and raise new research questions, the report states.

“Continued innovation, reflection and collaboration across sectors and industries are critical to address constraints in support of more resilient, inclusive, prosperous cities,” it adds.

“There are numerous next steps that stakeholders could take to improve city and infrastructure resilience – the challenge remains in making change happen at scale. One starting point is the establishment of a demonstrator city to act as a testbed,”  the report points out.

“Continued innovation, reflection and collaboration across sectors and industries are critical to address any constraints on creating resilient, inclusive, prosperous cities.”

Related: Federal disaster mitigation funding “a leap forward”: ICLR

Enhancing community resilience is also a topic of interest in Canada. As part of the latest federal budget, announced last week, Ottawa has announced commitments that include $2 billion to be “set aside for a Disaster Mitigation and Adaptation Fund (DMAF) to support the national, provincial and municipal infrastructure required to deal with climate change,” $182 million to be put towards implementing “new building codes to focus on climate resilience,” $73.5 million over five years to launch and administer a new Canadian Centre for Climate Services, and $16.4 million to ensure the country’s “federally managed transportation infrastructure is able to withstand the effects of natural disasters.”

Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction (ICLR), suggests the DMAF funding demonstrates Ottawa’s increasing support for disaster risk reduction. The announcement “shows a seriousness and commitment that we haven’t seen before,” McGillivray points out.

He likened the funding commitment to “a leap forward in the move toward building more resilient communities in Canada.”

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