Announcing the U.S. Flood Catastrophe Model
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Parcels (in purple) within 2,500 feet of the ocean but not in a storm surge-risk zone
I met with First American at GITA this year and learned that the company is an $8 billion Fortune 200 company, the largest provider of title insurance in the nation. In business since the late 1800s, the company began as a title company in California, whose clients now are involved with every part of a transaction that has to do with transacting real estate. Property information companies, tax companies, title insurance companies, specialty insurance companies such as homeowner’s policies, analytics companies for predicting loan default, all rely on First
American for transacting their properties.
As a provider of services to the lending industry, First American sees a flood risk management product as a valuable asset. “Every time you buy a piece of property, if the bank that’s making the loan is a federally backed bank, which most of them are, they are required by law to determine whether that property sits within the flood rate maps that the national flood insurance program puts out,” said senior product manager, Jason Sears. “And so we have a large marketshare within that service industry, so we provide most of the about 65% of the better marketshare today of flood determination.” Consequently the company has a rich background in GIS because determining whether a
property sits within the floodplain boundaries is a GIS function.
First American’s flood plain business utilizes several different applications, some are off the shelf, some are internal and proprietary. Right now, they run roughly around a million flood determinations a month depending upon the marketing conditions.
“For us to be efficient and cost effective we need to make sure those things hit automatically so it comes into our system and the GIS software automatically is able to tell us whether that property is in a flood zone or not. We have a lot of geocoding technologies and we have employed a lot of different databases to help us do that automatically. Around 90% of the time or better we’re able to get an automatic determination. The property comes in, hits our database, pops back out to the lender, says yes or no, this is in a flood zone. If it is, it tells them the flood zone they’re in. We have to be extremely accurate on that because we insure every flood determination that we do,
so basically if it’s a residential policy and we say you’re not in a flood zone, and it turns out you are, and you’re flooded, we have to cover just as though you had the flood insurance.”
Illustrates how the boundary of the flood waters (white line) extended beyond the 100-year floodplain (blue line) in Findlay, Ohio
In addition to having highly accurate geocoding capabilities, First American is able to utilize and gather a lot of data resources. Last April the company announced its intent to build the first national parcel database. By the end of 2008, First American will have 110 million parcels for the U.S. identified and captured in their database. You will be able to attach an address and a centroid with all the parcel boundaries. “There is a lot of interest from a whole lot of different industries: oil and gas, insurance, utilities,” said Sears.
First American recently acquired Proxix Solutions, provider of a geocoder called PixPoint, into which they have integrated all their parcels. Additionally Proxix’ insurance products around natural risk, such as wildfire, coastal surge, earthquakes and tax products fit naturally into First American’s focus.
With the acquisition of Proxix, First American could also incorporate its property data and tag it to parcels. Putting this information together with GIS, risks and scoring capabilities, the company has formed a new organization called First American Spatial Solutions.
According to Sears, flood zone determinations were developed by FEMA in support of the National Flood Insurance Program which informs an owner if a piece of property is in or out of a flood zone for the purposes of qualifying that person for National Flood (subsidized ) insurance. “That’s fine, if that’s the business you’re in,” Sears pointed out. “However, for a number of insurers, they’re looking for something that is more flexible than that program, and more robust, meaning they’re dealing with multi-million dollar structures. For commercial insurers, the National Flood Insurance Program doesn’t even begin to address the cost of working with the claim, so they need
something better than that. Something more extensive, accurate, more granular in determining the level of risk.”
Important factors for these insurers:
1) Accuracy – FEMA’s flood zone maps and flood zone determination product reflect the most extensive engineering effort nationwide to date. However, these are not good tools for determining accuracy and insurers say they need more reliable data. “Around 25-30% of flood claims filed every year are on properties outside that flood plain,” Sears said. In the case of specific storms and catastrophes, the percentage has ballooned up as much as 60% of properties that flood based on flood claims filed that are outside the flood plain.
2) Better understanding of whether high or low risk in a flood plain.
3) Flood risk as opposed to flood exposure. Flood risk is probability that an event is going to occur. Flood exposure is anticipated or forecasted losses due to flood within any given year. What’s the worst case scenario? “The way the insurance industry looks at it, they look at return periods, so they’re asking the question, was it a 500-year return period or every 500 years? What would the worst event in terms of financial consequences be?”
Sears stated that in order to determine this, you not only need to know the probability that an event is going to occur, and the frequency, you also need to know the severity, i.e., what’s the depth of flooding in a given spot in a given building, say 2 ft. or 4 ft. “You need to know what does 4 ft. mean, in terms of damage. Is that 20% of damage to the building? Half the value of the building? Will business shut down for a few days? What kind of contents are in that building?”
The U.S. Flood Catastrophe Model uses 500,000 events that are reflections of actual historical events. Combined with complex modeling techniques, it places a property using geocoding and it runs these hypothetical events against it. The report will say that property is going to be exposed to event #271 and this was based on the elevation of that property at that point. This is the exposure: that property will get 2 ft. of flooding, and because it’s commercial, that represents 20% damage. The client says the property is worth $2 million. Then the 20% damage is calculated in to come up with the exposure number.
Finally, Sears said you need to consider what kind of financial conditions are involved, such as deductibles. “This is exposure, and that’s where the U.S. Flood Catastrophe Model comes into play.”
Originally developed by SwissRe Insurance, one of the top five reinsurers in the world, the Flood Model was designed for the insurance vertical market. SwissRe ensures primary insurers who underwrite a lot of risk and ultimately need to be insured for the ultimate catastrophes. That’s where reinsurers come in. “SwissRe has every interest in the world to encourage people to underwrite flood so they can turn around and reinsure it. So they have this model they developed and has been validated against hundreds of thousands of actual clients, but they didn’t have the capabilities to go out there and actively market it,” explained Sears. In an exclusive partnership with First
American, SwissRe can begin to distribute that model out in the marketplace, build awareness and get people using it so they can derive additional business on their side.
They can also work with a company who has the tools and experience to improve and enhance that model. First American has 20+ years experience in flood risk, and has developed a number of unique data repositories that lend itself to making that model better.
Parcel based geocoding, plus advanced and current elevation data that the USGS has released, is offered as part of another product that can also enhance the U.S. Flood Catastrophe Model. “We have built out a database of around 85,000 dams and levees which reflects a number of publicly available databases and we’ve incorporated that as part of the flood risk score,” Sears noted. The advanced data is not yet part of the model, but it was instrumental in SwissRe’s decision to partner with First American.
According to Sears, “Flood is such a localized phenomenon. Two feet in elevation distance make a huge distance when it comes to flooding. Besides parcel based geocoding and flood zone determination, the flood risk score is an advanced underwriting tool that pulls in levees and dams, does some elevation calculations, checks for anomalies in the flood maps, with a tool that does real time weather monitoring and reports actual ongoing flooding conditions so people can look at properties that are exposed or in potential danger of flooding at the moment. The advanced flood risk solution makes sense as flood continues to be the most destructive and pervasive of all perils.”
In spite of this reality, the industry has shied away from it, because the tools have to date, not been available to give the industry the confidence to underwrite flood, Sears added. “They must feel confident they can identify and quantify the exposure; if you don’t know the exposure you don’t know how to price it.”
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