Flood warning: investor risk will only get worse

Events in Texas and Southeast Asia are a stark reminder of investment risks from extreme weather

As rain continues to fall in Texas in the aftermath of Hurricane Harvey, talk begins to turn to the economic and financial damage caused by the 130mph hurricane.
JP Morgan has predicted that the eventual insured losses could hit $20bn. In a more conservative estimate cited in a note from S&P Ratings this week, that figure was up to $6bn, with the lion’s share of that assumed by insurers rather than reinsurers. The ongoing rain, it says, “will likely exacerbate the magnitude of the insured losses”, most of which will be covered by the National Flood Insurance Programme (NFIP) – a government-backed scheme.
There are commercial opportunities that arise from such disasters, S&P Global Ratings points out. The NFIP may struggle to cover its losses via the Treasury, which “could further provide an impetus to involve private capital to a greater extent for the upcoming reauthorisation”. And petrol prices in the US and beyond have risen as a result of damages to a major pipeline and the closure of 15 refineries, due to flooding.
But in the main it will be losses that will be felt. Insurance claims are expected to pile in for damage to homes, cars and commercial property; and – with Houston’s standing as the US’s fourth largest city – significant business disruption. Most large national insurers will be diversified enough to absorb them, but S&P says more localised players could face “significant hits to their earnings and possibly their capital”, resulting in downgrades and negative reassessments for “certain outliers” such as Texas-focused Hochheim Prairie Insurance Group. The KBW Insurance Index, tracking US insurers, has tumbled this week.  
Insurance will, of course, not be the only sector to suffer a big hit after Hurricane Harvey. In an email to its clients, insurance broker Aon said “an abnormally high portion of economic damage caused by the flooding will not be covered”. S&P estimates that broader economic damages from the event will “dwarf” insured losses. Enki Research puts those broader damage costs at between $48bn and $75bn.
One report published this week by analysts at Cowen & Co predicts the financial damage to United Airlines alone could be $265m due to airport closures and possible changes to school timetables in Texas.In India, Bangladesh and Nepal, even more dramatic scenes have been unfolding this week, with the death toll from current monsoons passing 1,200. 1.8m children cannot attend schools due to closures; and flooding in Bangladesh alone is estimated to have damaged or destroyed nearly 700,000 homes already this year. It’s still unclear the extent of disruption to global supply chains that will be caused by the catastrophe. Research from the World Resources Institute in 2016 concluded that India has $14.3bn of GDP at risk annually from flooding. Globally, it estimates this figure to be $96bn, rising to $521bn by 2030.  

103 cities were found to be at serious risk of flooding, including Miami, Pittsburgh, London and Johannesburg

A report released by environmental data collector CDP this week reveals that these issues are a growing concern for the public and private sectors.
“We are seeing critical shifts in leadership from cities and companies in response to the very real threat of flooding, for example, to local economies,” says Morgan Gillespy, Head of CDP’s Water Programme. 103 cities out of the 569 surveyed for the report were found to be at serious risk of flooding, including Miami, Pittsburgh, London and Johannesburg. 196 reported risks of water scarcity.
Many cities are now working with the private sector to address those risks, the report adds: 80 cities surveyed are seeking $9.5bn of investment between them for water management projects. Most of these are in Latin America, but North America comes in second, and Asia and Oceania, Europe and Africa follow with lower demand. 
“This week’s tragic events in Texas and South East Asia highlight the catastrophic impact of water risks,” says Gillespy. “As well as human suffering and devastation, business also grinds to a halt. The global cost from water-related issues for businesses already runs into the billions, and this will only increase with climate change and rising sea levels. Investors now need to factor flooding risks into their investment decision making.”