What are the risks keeping European risk managers awake at night?

The following is an interview between Randy Lewis, VP of Loss Prevention Education, Design Professional and Adam Reeder, PE, CFM, Senior Project Manager and a principal at CDM Smith, a full-service architectural and engineering firm headquartered in Boston, Massachusetts. Since 2007, Reeder has been working with the U.S. Federal Emergency Management Agency (FEMA) on dry floodproofing and other disaster issues. He also recently completed the flood-related portion of an economic analysis report for the National Institute of Building Sciences entitled Mitigation Saves 2.0.

Randy asked Reeder to help enlighten designers about the dangers of overreliance on FEMA flood maps when working in areas with flooding potential and the risks associated with signing FEMA floodproofing certificates. He spoke to us from his office in Raleigh, North Carolina.

Randy Lewis: You’ve expressed serious concern about the tendency of design professionals to rely too heavily on FEMA’s flood insurance rate maps, or FIRMs, when determining the elevation of a structure’s foundation. What’s wrong with these FIRMs?

Adam Reeder: There’s nothing wrong with them as long as they’re used for their intended purpose, which is insurance rating, and not used as the sole source for design information. FIRMs indicate the Base Flood Elevation (BFE) and are the maps referenced by local ordinances, building codes, and design standards as the basis for calculating the minimum required elevation. Think of them as a starting point for designers.

RL: What’s their insurance-related purpose?
AR: FEMA initially created the maps so the National Flood Insurance Program (NFIP) could rate buildings within a floodplain. The maps are used to compare a reference elevation, such as the elevation of the top of the lowest finished floor, to the elevations (BFEs) presented on the maps, which are based on the one-percent annual chance of a flood, also referred to as the chance of a 100-year flood.

RL: Why have the FIRMs been adopted for use by designers?
AR: More than 20,000 communities participate in the NFIP. Since participation requires a community to adopt the FIRMs in its floodplain ordinances, local building codes eventually adopted the maps as the minimum standard that builders must meet. The FIRMs are the most widely available source for flooding information.

RL: Why shouldn’t designers rely so much on the FIRMs?
AR: The maps represent the probable flood patterns at the time FEMA did the hydraulic and hydrology modeling. If a map has been updated, a designer must determine whether the map reflects new modeling or whether there was some other change that FEMA recognized (e.g., incorrect elevations on the map that may not change the flooding dynamics) and revised the map without re-running the flood modeling. A map with a 2009 date could represent modeling done in the 1980s. Overall, the maps represent the best available data at the time the modeling was done. A lot can change in a community in 20 or 30 years—roads are paved, new developments arise, forests are cleared and so on. All of these factors could increase flood heights. We should also remember that the maps are intended to represent current conditions— designers should think about changing flood conditions over the life of a building and design with these changes in mind.

RL: When an area is hit with major flooding, does FEMA take any immediate action to upgrade the maps?
AR: Whenever there’s major flooding, such as in Houston with Hurricane Harvey, FEMA will study the affected area. They’ll create advisory maps that are conservative and probably set elevations higher than reality just to be safe. They’ll tell communities to use those until the agency can do more detailed maps, which usually takes about three years. The communities then need to formally adopt the maps in order for them to be considered effective.

Natural catastrophes can have a huge impact on a company, its operations and its workforce. For risk managers, estimating the annual losses suffered by a portfolio of assets and getting a sense of how an event could affect key facilities or locations is indispensable to allocate resources and prioritise risk mitigation efforts.

During the first half of this year, natural catastrophes caused insured losses of more than €1.3 billion in Germany alone, according to the German insurance association, Gesamtverband der Deutschen Versicherungswirtschaft e.V. Much of that loss total was caused by severe thunderstorms and violent hailstorms combined with a heatwave.

Hailstorms also caused widespread losses in Italy and Greece earlier this year, while wildfires ravaged areas of Spain after a period of intense hot weather. Last year, the Seine burst its banks after rising to four times its normal level following rainfall of double the annual average during Paris’ second wettest winter since 1900.

The list of weather-related events goes on. And other types of natural catastrophe are also a cause for concern for risk managers in Europe.

The devastating earthquake that hit central Italy in 2016 resulted in widespread damage to buildings and tragically resulted in the deaths of 295 people. The earthquake left about 4,000 people without homes and injured more than 400. Just seven years previously, the Abruzzo area of central Italy was left reeling from the after effects of another earthquake which left more than 300 people dead and more than 70,000 homeless. Catastrophic events have a devastating, long-lasting effect on people’s lives and the communities in which they live and work.

In the industrial sector, a loss at one facility can propagate worldwide because of business interruption and logistic or supply-chain disruption.

Understanding natural catastrophes and the way they might affect clients’ operations is a vital part of the work insurers aim to do.

It is important to learn from experience and to leverage an extensive database of losses, covering both catastrophic and non-catastrophic events. Gathering and examining years’ worth of loss histories from flood events that have affected clients all over the world means we are better equipped to estimate what damage a client might be exposed to the next time water reaches a certain height.

But past loss data cannot provide a complete picture, especially considering the rapid changes in our society, environment and climate.

Data has always been a key tool for risk managers – and for their broker and underwriter partners too. We are entering now a new era for data, which could prove a game-changer for the risk management profession.

The Industrial Internet of Things, whereby interconnected sensors and devices are used to enhance manufacturing processes, is transforming the way companies work, resulting in enhanced efficiencies and also providing them with stacks of powerful data.

And the ability to harness that data, to analyse it and unlock its potential will transform the way risk managers are able to perform their jobs.

At the Federation of European Risk Management Associations’ forum in Berlin in November, I am taking part in a panel that will explore how Artificial Intelligence (AI) and data will change the practice of risk management.

I’m looking forward to hearing views from my fellow panellists and the wider room; this is a topic that we at AXA XL are excited by, and we are taking part in several proofs of concept that we believe could give powerful data insights to help risk managers, risk engineers and underwriters to improve the way risk is understood, managed and transferred.

AI and data

Artificial intelligence is becoming part of day-to-day commercial life. There are now about 1,600 AI start-ups in Europe, according to recent research.

And there are many ways in which AI is not just helping businesses to work more effectively but also to begin to manage their risks in a different way.

A concrete example is our partnership with Parsyl Inc., a supply-chain platform that helps shippers, their clients, and insurers to understand the quality of the conditions that sensitive or perishable goods are kept in.