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By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®

Scenario: After the Howard Hudson Dam was built in 1962 in the Lower Green River Valley near Seattle, Wash., commerce and industry flooded in. The dam gave businesses and employees in towns like Kent, Auburn, Renton and Tukwila the sense that they were safe from everything up to a 100-year deluge.

Before the Howard Hudson Dam, the valley used to fill up every couple years. The worst event in the area's recorded history occurred in December 1959. The waters reached the second floors of buildings.

The dam was meant to stop that from happening again, and it used to. Then in January 2009, a heavy rainstorm helped to reveal to engineers that the dam suffered from "piping," a form of erosion that can lead to failure. It's thought that perhaps a past earthquake helped bring this on. Because of the weaknesses, it's no longer safe to allow the dam to hold back as much water, meaning it no longer provides the same amount of protection.

The federal government is spending $44 million in temporary fixes, but until a permanent fix is found, the whole flood management system in the valley is at risk. Levees in the area are based on that 100-year-event probability, not the current state of uncertain affairs.

Billions of dollars in industrial and commercial property, including plants owned by massive firms like Boeing and FedEx, is in danger. And ever-increasingly so.

After all, 100-year floods seem to be happening more and more these days, given the unpredictable and often severe effects of climate change upon weather events.

The great flood of '59 released 28,000 cubic feet per second of water into the Lower Green River Valley. A similar event today (of 25,000 cfs) would affect 80 percent of all commercial and industrial property in the valley, according to AIR's estimates, or nearly $22 billion in property values.

Tim Rose, senior vice president and chief underwriting officer for national accounts, property division, at Liberty Mutual, sees as big an insured loss in the area as was experienced from Nashville, Tenn.'s flooding in May 2010, or even bigger--upward of $10 billion in insured losses. The economic losses would be far greater. You would hope the thousands of citizens would have time to get out of the way of the water, too.

Analysis: The Lower Green River Valley is just one example of inland flood risk. The federal government estimates that 4,400 of the nation's 85,000 dams could be susceptible to failure. Levees are a whole other business.

In the Great Midwest Flood of 1993, when about $15 billion in economic losses were suffered and as many as 150 people lost their lives, about one in five federal levees failed, but 75 percent of all nonfederal levees failed, according to Abebe Jemberie, senior research engineer at AIR.

Businesses of the Sacramento area, heed these numbers well. The region comes up just as often as Washington state in discussions of "who's next."

Scary thing is, inland flood isn't even where the massive loss potential is when talking of the new nexus between poor infrastructure, rising waters and climate change. See the coastline for this. We could have just as easily fallen back on using Hurricane Katrina as the risk scenario above.

Katrina classically illustrated the flood risk problem: the cycle of neglect with occasional investment in flood protection, as Robert Muir-Wood, chief risk officer at Risk Management Solutions Inc. (RMS), another of the big risk modelers, explained it.

In New Orleans, the levees were dilapidated, ignored ... until Hurricane Katrina on Aug. 29, 2005. We all know what ensued. The city flooded. Only then did people throw dollars at the problem, billions of it. Nearly six years later, one could argue that the latest catastrophe of the month, and the one before that, has taken attention away. The levees are forgotten again. The cycle of investing at the wrong time, failing to do so at the right time, continues, Muir-Wood said.

Meanwhile, New Orleans hasn't stopped sinking.

"It's actually sinking quite fast," Muir-Wood said. "Eventually it will be flooded again."

And the problem isn't just the Crescent City. Massive refineries just outside the city are sinking, too. Energy operations farther west in Louisiana and around Houston might not be losing elevation, but they are just as vulnerable to hurricanes and storm surge. Muir-Wood also pointed to the industry and commerce around New York City.

All at risk from water, and getting more so. Why? Climate change.

"Evidence is hurricanes have become more intense," Muir-Wood said. With stronger storms come higher surges. Even if you don't believe that climate change is affecting hurricane strength, consider that rising sea levels will make more coastal areas vulnerable to surges. It's simple topography.

Desperate measures are not necessarily needed yet to protect an enterprise from rising seas and raging rivers. Mitigation measures are--or in the parlance of climate change, adaptation. Problem is, for private businesses, much of adaptation--stronger levees, sea walls and the such--are public projects, dependent on political will to fund them.

Don't bet on that funding. According to a 2009 Government Accountability Office (GAO) report on climate change adaptation, most federal, local and state government authorities have not begun to adapt to climate change. In the survey, about 71 percent said that "nonadaptation activities" are more pressing. Given the deteriorating budgets of most governments, today that number most likely is higher.

The situation elsewhere isn't much different. The United Nations estimated that about $36 billion to $135 billion needs to be spent each year to address climate change.

"The resources committed to such global initiatives, however, fall far short of what is actually needed for adaptation worldwide," wrote the authors of a Swiss Re report on this topic, titled "Weathering climate change."

Swiss Re and its competitors in global insurance have a huge stake. Weather-related annual insured losses rose from $5.1 billion from 1970 to 1989, to $27 billion annually since then. It isn't just a matter of more exposed property, or inflation. It's a matter of more frequent and violent storms, inland and on the coast.

For the individual businesses that make up those statistics, the solution is loss prevention on a local level. For Liberty Mutual's Rose, businesses ought to ask themselves why they are located near water. Is it necessary? If it is, then harden your property. Ensure it's built to code at least, know at what elevation it's located and what the most current flood map data says about that elevation, and then focus on how you built the property. Should it have elevated foundations, for instance, or even sea walls?

Just because you are "away" from the water, don't assume you're safe, Rose stressed. "That doesn't mean, though, you'll always escape the issue," he said, referring in particular to the recent example of Nashville, where businesses well back from the flood plain suffered losses.

The reason, in part, is that flood risk is shifting, perhaps faster than risk managers can get their hands on it, because of climate change.

"In reality, your levels of risk could be changing, or are changing," Muir-Wood said.

Of course, property insurance with appropriate sublimits for flood is a way to transfer this risk. Some of those aforementioned refineries might also require energy and environmental coverage, given the potential for an ecological disaster post property damage. See the Murphy Oil mess during Katrina for an example of that, Muir-Wood said.

Proper supply chain management, or business continuity planning if that's what you call it, is also essential, Rose said. Know which other of your plants can step up should another flood, or perhaps a partner or even a competitor could fill the hole.

Ultimately, however, the best way to avoid a property or business-interruption loss is to avoid the flood altogether. In other words, relocate. Those refineries outside of New Orleans are a good example.

"At some point, they have to move," Muir-Wood said.

(Read about our sixth emerging risk, nanotechnology risk.)

May 1, 2011

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