Systemic Financial Risk Arising from Residential Flood Losses

Area of Science:

• Environmental Science
• Economics
• Urban Planning

Background:

• Residential flood damage is typically categorized as insured or uninsured, with financial risks to property owners and insurers.
• Lenders and local governments also face financial risks from flooding, but the distribution of these risks is not well understood.
• Indirect flood losses, such as decreased property values, are substantial but rarely quantified, complicating risk assessment.

Purpose of the Study:

• To quantify combined direct and indirect flood losses.
• To evaluate the financial risk exposure of property owners, lenders, and local governments.
• To assess the risk of mortgage default and property abandonment following a major flood event.

Main Methods:

• Utilized property-level data including sales, mortgages, and insurance claims.
• Applied machine learning techniques and geostatistical methods for loss estimation.
• Analyzed data in eastern North Carolina following Hurricane Florence (2018).

Main Results:

• Hurricane Florence caused an estimated $1.77 billion in combined uninsured damages and property value decreases.
• An additional $562 million in potential losses were identified due to increased mortgage default and property abandonment.
• Areas with lower pre-flood property values exhibited greater financial risk exposure.

Conclusions:

• Flood losses extend beyond direct damages to include significant indirect impacts on property values and systemic financial risks.
• A comprehensive understanding of flood-related financial risks is crucial for developing effective flood resilience strategies.
• More granular estimates of systemic financial risk can inform policy and planning for flood-prone areas.