FloodZone7

Exploring a Community Based Insurance Option for Santa Venita

Step 1 Establish the assumptions.

What is the height of the 100-year flood?

The San Francisco Extreme Tide Study suggests that the 100-year high tide is about 9.7 feet. The 500-year high tide is about 10.7 feet Mak et al. (2012).

What is the height of the berm?

The current height of the berm is about 7.6. Thus it is at the 2 year level. Assume that incremental improvements are made to get ti to 9.5, the 100-year elevation.

If the berm is over topped what is the damage?

Assume worst case, the area is a bathtub and the height of the over topping is the height of the damage.

Assume a depth damage curve.

This is a simplified depth damage curve. It reflects the probability that homes flooded by seawater to a depth greater than 4 feet are likely to have damage that exceeds the NFIP cumulative damage threshold and are likely to need to be elevated. Because these homes are slab on grade, they will likely have to be torn down and completely replaced.

Depth	Percent Damage
.5 feet or less	30%
.5 to 3 feet	40%
3 to 4 feet	50%
4 feet or more	100%

Assume a square foot cost to rebuild

Assume that it costs $1,000 per square foot to rebuild each house. This is likely to be a high estimate but given the fact that so many homes will be damaged at one time, and given the high cost of living in Marin it is a reasonable conservative planning number.¹

Step 2: Characterize the risk

What are the characteristics of the building stock in Santa Venita

This chart show that most of the homes are located at an elevation of between 6 and 8 feet.

Assessment of the 100-year flood

This chart shows the depth of flooding likely associated with a 100-year flood.

This chart shows the number of homes likely do be damaged at each damage category. It it suggests most of the houses will have damages between 40 and 50 percent of the cost to rebuild.

What stands out from this chart is the fact that the NFIP, which caps payments at $250,000 leaves the majority of households under-insured.

If there is a 100 year flood, the estimated total cost to rebuild is $437,132,000.

The following chart shows the average annual loss (AAL), which is also called the pure premium. This is the cost an insurer would charge to cover the expected losses if there was no overhead. I use a simplified deterministic method. An insurer would likely use a stochastic method to arrive an AAL figure. This chart shows that the expected cost to fully cover the expected losses is over $5,000 per year before insurance overhead costs. In comparison, the NFIP premiums are around $5,000 for a maximum coverage of $250,000. Although the NFIP may be perceived as affordable, it can result a large financial protection gap that can impact families credit ratings for a generation.

Assessment of the 500-year flood

If the TRB were to be constructed to 11 feet, it would provide protection from a 500-year high tide. Estimating the losses associated with a 500-year event provides insights into the value of raising the berm.

This chart suggests that about half the homes will have damages of between 40 and 45 percent of the rebuild costs but half of the homes will need to be torn down.

This graph shows the cost to rebuild. It shows the stark contrast that half of the homes will be rebuilt and half will likely be torn down.

This chart shows the average annual loss at the 500-year recurrance interval.

This chart compares the Average Annual Loss between the 100 year and 500 year event.

The total expected loss from a 500-year event is $648,649,900.

Step 3 Quantify the risk

How do the two events compare?

The total AAL for the 100-year event is $4,371,320 while the total AAL for the 500-year event is $1,297,300. The per household AAL for the 100-year event is $6,653.46 and the per household AAL for the 500-year event is $1,974.58.

How might an insurance program work?

Tier 1

Tier 1 might be community based insurance tier handled by reserves. Assume that the County picks up the first $10,000 of loss. They might want to do this for a variety of reasons. The County might want to send a signal that homeowners should have flood insurance. A homeowner would be hard pressed to make the case that they did not know they needed flood insurance if they received a letter informing them that the County was covering the first $10,000 of loss. This would allow everyone to take the $10,000 deductible option if they purchase a traditional insurance policy, saving every homeowner an average of $500 per year.

There are 658 structures. Thus, a loss would cost $6,580,000, an amount that could be handled with reserves. Thus, this policy would cost the County nothing, unless there was a flood.

Tier 2

Tier 2 might be a community based insurance tier handled by contingent credit. Assume that 50 % of the households seek to buy $100,000 of coverage. The total cost of a loss would be $32,900,000. The county has bonding capacity for a $25M bond. The county might leverage this bonding capacity to implement a contingent credit arrangement. In order to make this affordable the County might charge $1,000 per year for this coverage. This would generate $657,000 per year. If there is no flood, money from premiums could go into a reserve account, maintenance or upgrading the system.

The County might want enter into this arrangement because it would make higher levels of insurance more affordable and more attractive. If there is a flood, for the five or more years after the event, the county will likely lose $1M per year in property taxes. Houses that are insured recover faster, incentivizing people to buy higher levels of flood insurance would reduce the number of years they would request a discount in their property taxes.

Tier 3

Assume that 30% of the homeowners an additional $500,000 of coverage. The total cost of the loss would be $98,700,000. This might be financed with $100M catastrophe bond. The coupon payment for such a bond might be $3M per year. Assuming that is the case then the cost per household would be $15,197.57. This is likely to be unattractive to households. But this might support other discussions that might lead to a more affordable arrangement. The county might consider offering a slight reduction in property taxes for those households that choose to buy insurance through the community based insurance program.

References

Mak, Michael, Erica Harris, Mark Lightner, Justin Vandever, and Kris May. 2012. “San FransiscoBay Tidal Datums and Extreme Tides Study.”

Footnotes

1. https://whitepalaceconstruction.com/cost-of-new-construction-homes-in-bay-area/#:~:text=Average%20Cost%20to%20Build%20a,ft.