Flood Risk

Protecting Dam Breach Inundation Zones

Dam failures are a ‘low probability but high consequence’ event best addressed by preparation and maintenance.
By: | February 28, 2017 • 7 min read

After a five-year drought, the rains finally returned to California this winter. Lake Oroville, which was formed in 1967 at the foot of the Sierra Mountains by the nation’s tallest dam, began to refill.

An atmospheric river, colloquially known as a “Pineapple Express,” continued dropping water at such a pace that it replenished the reservoir and then some. The swollen lake forced the excess water onto an emergency spillway alongside the Oroville Dam for the first time in half a century.

The spillway cement crumbled and sent a cascade of water down the mountainside. Engineers feared the erosion compromised not only the spillway but also the 770-foot-tall earthen dam.

An emergency evacuation was hastily ordered and nearly 190,000 residents were forced to flee their homes. Traffic clogged roads. Fortunately, no life was lost and water levels eventually receded.

“There has to be a more robust conversation around flood.” — John Dickson president, NFS Edge Insurance Agency

For many, this crisis is a wake-up call for renewed assessment of the aging infrastructure of the U.S. dam system and the emergency response plans drawn to prevent loss of life in the event of a failure.

Dams Exceeding Effective Dates

Nearly all of the 700 dams managed by U.S. Army Corps of Engineers are more than 30 years old. More than half have reached or exceeded the 50-year service lives for which they were designed. Oroville Dam turns 50 next year.

Tim McCarty, risk control manager, Trident Public Risk Solutions

Tim McCarty is a risk control manager at Trident Public Risk Solutions, which insures a wide range of municipalities including those in close proximity to a dam. His statistics on the aging dam system in the U.S. are even more alarming.

“The average age of our dams nationwide is 56 years,” he says. “And, the average age of a failed dam is 62 years.

“So we’re kind of reaching that point where we’re starting to have some very old infrastructure and if it’s not properly maintained we may see repeats of this type of an incidence,” McCarty said.

The Federal Emergency Management Agency says dam failures are a “low probability but high consequence” event.

Since they rarely occur, many people who live downstream in “dam breach inundation zones” are completely unaware of the potential hazard. But they are, in fact, at the mercy of the dam’s ongoing health.

“The only time the concept is front and center is when water is rushing over the dam,” said John Dickson, president of NFS Edge Insurance Agency.

“I worry constantly that that’s a total disservice to the American people. We need to have the conversation when the sun is shining.”

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Dams are a vital part of the U.S. infrastructure. They provide flood protection, water supply, hydropower, irrigation and recreation. But all it takes is one busy muskrat to compromise the integrity and cause a breach.

The operators of the Oroville Dam were advised in 2005 to shore up the spillway with concrete. For a dozen years, the expensive recommendation was tabled. The reasoning was the emergency spillway was never used because the lake water never rose high enough.

“With a dam breach, when it fails, it fails quickly, the water comes out quickly and there’s a limited amount of time.” — Dr. Louis Gritzo, vice president and manager of research, FM Global.

But when it finally did, the emergency response — mass evacuations and helicopters conducting air drops of dirt and boulders to fortify the dam —averted a catastrophe.  But it also was an expense way beyond the cost of maintenance.

Perhaps most alarming, not all people received the emergency notification when the evacuation was called, according to the Associated Press.

Dams Fail Quickly

Every four years, the American Society of Civil Engineers issues a “Report Card for America’s Infrastructure.” Bridges, roads, tunnel systems are evaluated on capacity, condition, funding, future need, operation and maintenance, public safety, resilience and innovation.

Dams received a “D” grade in the 2013 report. The next report is due March 9, and there is no expectation for a major shift in that grade. The Army Corps of Engineers estimated it would currently take $24 billion to fix all dams that need repairs.

State agencies regulate most of the nation’s 84,000 dams. Unlike bridges and roads, the U.S. government may inspect the dams but they don’t maintain most of them. More than 65 percent are privately owned and those owners may lack the money needed for adequate maintenance.

Louis Gritzo, vice president and manager of research, FM Global

Experts say dam owners need to know how their structures are aging and prepare for the repairs that need to be done. Develop a timeline for a replacement and how to respond if the dam fails.

“We’re chasing an aging population,” said Louis Gritzo, vice president and manager of research with FM Global.

It is most important to conduct regular inspections and deal with what seems to be minor issues immediately.

“Many people just think you build a dam and it’s just there and fades into the background,” McCarty said.

“But it really is an active system that has to be maintained just like a road or a bridge.”

Gritzo said he discusses with clients opportunities to retrofit facilities and fill in the weak spots. More often than not, an engineer looks at an aging structure and weighs when it is best for a new build. The cost of that is often too challenging, Gritzo said.

Unlike a river flooding over its banks, a dam breach may occur with little to no warning. For that reason, an emergency response plan is needed to lay out how much time is required to get mitigation efforts in place and who is responsible for completing each task.

Conduct Hazard Assessments

“With a dam breach, when it fails, it fails quickly, the water comes out quickly and there’s a limited amount of time,” said Gritzo.

Risk managers need to conduct a very good hazard assessment in the event one of these dams has a catastrophic failure. FM Global uses tools such as complex computer models to calculate different breach scenarios and determines where the water might go and how much flooding might occur when it gets there.

As of 2015, a quarter of dams designated “high hazard” don’t have an EAP.

The insurer works with clients to decide if that amount of water is something they can protect a facility against, or if it’s too large.

“If it’s a meter of water or less you can protect against it,” Gritzo said. “That’s an easy cut-off point.”

More than a meter of water and there’s much fewer protection measures available.

The risk manager that is associated with the facility needs to know the risk exposure, how to react and who to contact in an emergency.

As of 2012, there were 13,991 dams classified as “high hazard,” up 3,000 from a decade earlier.

When a dam is designated a “high hazard,” it means there’s a potential for loss of life if it fails. All high hazard dams require an emergency action plan (EAP). Dams with a “low hazard” or “significant hazard” may have a low expectation for loss of life but still carry potential for damage to surrounding terrain, roads or buildings.

As of 2015, a quarter of dams designated “high hazard” don’t have an EAP. Sometimes, the owners don’t even know they are labeled high hazard, McCarty said.

Risk managers should contact the authority or municipality that creates the EAP to start an ongoing communication and organize emergency drills.

“The time to be swapping business cards and introducing yourself is not when there’s an emergency,” Gritzo said.

John Dickson president, NFS Edge Insurance Agency

McCarty periodically reviews the state assessments of dams in his clients’ communities to try to ascertain the condition of the dams and what kind of ongoing maintenance has been required. He also checks to make sure each community has an EAP in place should something occur.

“Our clients are doing a great job with it, but we know that there are a lot of dams that aren’t getting the attention they need,” McCarty said.

“There has to be a more robust conversation around flood,” said Dickson of NFS Edge.

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“The way we do that is not responding in the face of imminent disaster but having the conversation when the levee is not about to be breached or the spillway is not being activated because the dam is at historic highs.”

Municipal leaders should prepare to address the ongoing maintenance that is needed, the EAP they have in place and the responsibilities that go along with having a dam, McCarty said.

“We’ve had an incident here that has heightened our awareness. Those things tend to tail off as time passes,” McCarty said.

“We really need to keep this in our collective memories otherwise we’ll see more and more of these incidents occur.”

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]

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Business Interruption Risk

Hidden Risks of Violence

The Las Vegas shooting and other tragedies increase demand for non-physical damage BI coverages. The market is growing, but do new products meet companies’ new needs?
By: | December 14, 2017 • 5 min read

Mass shootings in the United States and the emergence of new forms of terrorism in Europe are boosting demand for insurance against losses caused by business interruption when a policyholder suffers no direct property damage, according to insurers.

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But brokers say coverage for non-physical damage BI (NDBI), needs to evolve to better meet the emerging needs of corporate clients.

For years, manufacturing clients sought a more comprehensive range of NDBI coverages, especially due to the indirect effects of natural catastrophes such as the Thai floods that disrupted global supply chains in 2011.

More recently, however, hospitality and entertainment companies are expressing interest as they strive to adapt to realities such as the mass shootings in tourism hotspots Las Vegas and Orlando and terror attacks in such popular destinations as New York, Paris, Berlin, Barcelona and London.

In addition to loss of life and property, revenue loss is a real risk. Tragedies that cause a high number of fatalities can cause severe financial losses, especially for companies relying on tourism, as visitors shy away from crime scenes.

Precedents already exist. Paris received 1.5 million fewer visitors than expected in 2016, after the French capital was targeted by a series of deadly terror attacks the year before.

More recently, bookings declined in the immediate aftermath of a shooting at the Mandalay Bay Resort and Casino in Las Vegas that took the lives of 58 people on October 1: Bookings at the hotel have since recovered.

Joey Sylvester, national director of operations & planning, Public Sector, Gallagher

“The recent horrific mass shootings in Las Vegas, Nev., and in Sutherland Springs, Texas, raised awareness and concerns about similar events occurring in areas where the public congregates, such as entertainment venues like sporting events, concerts, restaurants, movie theaters, convention centers and more,” said Bob Nusslein, head of Innovative Risk Solutions Americas, Swiss Re CS.

“The second highest NDBI cover to natural catastrophes is terrorism, including active shooter and mass shootings.”

However, products available in the market do not always provide the protection companies would like. Active shooter coverages, for example, focus mostly on third-party liabilities that policyholders may face after a shooting.

Loss-of-attraction policies often define triggering events with a high degree of detail. These events may need to be characterized as a terrorist attack or act of war by authorities. In some cases, access to the venue needs to be officially cut off by police.

It follows that an attack by a 64-year old ex-accountant who shoots hundreds of people for no apparent reason — as was the case in the Mandalay Bay tragedy — isn’t likely to align with a typical policy trigger.

But insurers say they are trying to adapt to the evolving realities of both mass shootings and terrorism to meet the new needs expressed by clients.

“The active shooting coverage is drawing much interest in the U.S. market right now. In Europe, clients are increasingly inquiring about loss of attraction,” said Chris Parker, head of terrorism and political violence, Beazley.

“What we are doing at the moment is to try and cross these two kinds of products, so that a client can get coverage for the loss of attraction resulting from an active shooting event.”

Loss-of-attraction policies cover revenue loss derived from catastrophic events, and underwriters already offer alternatives that provide coverage, even when no property damage is involved.

To establish the reach of such a policy, buyers can define a trigger radius — a physical area defined in the policy. If a catastrophic event takes place within this radius, coverage will be triggered. This practice is sometimes called “cat in a box.”

Some products specify locations that, if hit by a catastrophic event, will result in lost revenue for the insured. For resorts or large entertainment complexes, for example, attacks on nearby airports could cause significant loss of revenue and could be covered by NDBI insurance.

Measuring losses is a challenge, and underwriters may demand steep retention levels. According to Parker, excess coverage may kick in after a 20 percent to 25 percent revenue drop.

Insurers will also want proof that the drop is related to the catastrophic event rather than economic downturn, seasonal variances or other factors.

“Capacity is very large for direct acts of terrorism but lower for indirect terrorism and violent acts because the exposure is far greater,” said Joey Sylvester, national director of operations & planning, Public Sector, Gallagher.

“Commercial businesses, public entities, religious and nonprofit organizations have various needs for this type of coverage, and the appetite is certainly trending upward.”

It is difficult to foresee which events will cause business disruption. As a result, according to Nusslein, companies generally prefer to purchase all-risk NDBI covers rather than named-perils coverage.

“The main reason is that, if they have coverage for four potential NDBI events and a fifth event occurs, the fifth event is not covered,” he said. “Insurers, new to NDBI covers, still prefer named-perils covers over all-risk cover.”

Current geopolitical tensions are also fueling buyers’ demands.

“Many companies want nuclear, biochemical, chemical and radiological exclusions removed from terrorism NDBI covers. While this is more difficult for insurers, it is not impossible,” Nusslein said.

“War risk NDBI cover is becoming more sought after due to political tensions between the U.S. and North Korea.”

“Many companies want nuclear, biochemical, chemical and radiological exclusions removed from terrorism NDBI covers. While this is more difficult for insurers, it is not impossible.” — Bob Nusslein, head of Innovative Risk Solutions Americas, Swiss Re CS

Natural catastrophes still constitute the largest share of perils underlying NDBI products.  Parametric indexes are increasingly employed to provide uncontroversial triggers to policies, said Duncan Ellis, U.S. property practice leader, Marsh.

These indexes range from rainfall levels and wind speed to the measured intensity of earthquakes. Interest in this kind of NDBI coverage expanded after the recent hurricane season.

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“The benefit of these products is that you do not have to go through the settlement process, which clients hate,” Ellis said.

NDBI policies are often bespoke, which is more common for very large insurance buyers.

“Usually, the market offers bespoke coverages for individual industries or clients, with very significant deductibles,” said Tim Cracknell, partner,  JLT Specialty.

NDBI cover can also help transfer regulatory and product recall risks. The life science sector is expressing interest in this kind of solution for cases where a supplier goes bankrupt or is shut down by a regulator, or a medication needs to be recalled due to perceived flaws in the manufacturing process.

Experts say that concerns still to be addressed are NDBI losses caused by cyber attacks and pandemics.

Capacity is an ongoing concern. According to Swiss Re CS, $50 million to $100 million, or even more, can be achieved through foundation capacity provided by a lead insurer, with syndicated capacity to other insurers and reinsurers, depending on the risk. &

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at [email protected]