ECONOMIC DAMAGE COSTS

Overview

Every economic case for a Nature Based Solution rests on a claim about losses that will not happen. Those losses have to be estimated before they can be avoided, and the damage cost methodology is what turns a hazard of a given magnitude into a monetary figure that the economic assessment can use.

What it covers

The methodology sets out the chain from hazard to damage. A hazard event is characterized by its magnitude, duration and spatial footprint. Exposure is built from an inventory of the assets at risk, valued consistently, whether those assets are buildings, contents, infrastructure, agricultural production or business interruption. Vulnerability is expressed through damage functions that relate the intensity of the hazard at the asset to the proportion of its value that is lost, and those functions differ by asset type and by hazard.

The guidance covers the construction and calibration of those functions, the data they require, and the treatment of the effects that damage functions handle badly: the losses that occur away from the flooded or affected asset through the interruption of supply chains and services, the health and displacement effects that fall on households, and the losses that are never recorded because no claim is made. It also sets out how damage estimates are aggregated from the asset to the catchment or the city, and how the aggregation handles assets that are exposed to more than one hazard.

For insured losses specifically, the methodology connects the physical damage estimate to the structure of an insurance or reinsurance portfolio, so that the reduction in expected loss produced by an intervention can be expressed in the terms that an insurer uses. This is the link that allows the same intervention to be presented as a risk reduction measure and as a reduction in the cost of risk transfer.

How it is used

Damage cost estimates are produced for the demonstration areas and feed directly into the demonstration-level economic assessment and into the insurance value calculation. The catastrophe risk modelling work applies the same chain at portfolio scale, and the demonstration of insured damage modelling shows how the functions behave when applied outside the area they were calibrated in.