Return on investment from wind hazard mitigation

Abstract

Coastal properties are a complex combination of amenity, value and risk. Hazard mitigation is one potentially valuable tool to increase the resilience of properties by reducing expected damages in the event of periodic and catastrophic storm events. The benefits of mitigation can accrue at both the individual and community level. There is actually very limited extant research related to the costs and benefits of wind-hazard mitigation, and what does exist focuses on one potential benefit or another, but not the full suite of benefits simultaneously. We propose to construct a discrete-time discounted netpresent-value framework that accounts for the flow of costs and benefits over time. Specifically, the project will take a forward-looking "what-if" approach that identifies a set of representative property types, and estimates the magnitude of the three key benefits accruing from each mitigation approach available to them:

1. Wind policy premium savings based on mitigation discounts;
2. Property value increases accruing to mitigation improvements, based on existing literature;
3. Reduced expected damage costs and/or claim deductibles due to mitigation undertaken, based on existing literature and estimates of relationships between storm strike probabilities, wind ratings on building material, and expected damages.

The analysis would be estimated over a 30-year time horizon, i.e., the length of a typical home mortgage, using appropriate discounting, to give both a short- and long-run outlook of benefits and costs. We will consider scenarios for new construction and existing properties. The geographic focus would be properties located in the coastal counties of Baldwin and Mobile in Alabama, and Jackson, Harrison and Hancock in Mississippi. Analysis will consider properties both proximal and distal to the coastline. 

Objectives

1. To identify those wind hazard mitigation strategies that are most relevant to Gulf Coast communities,
2. To identify a representative set of community conditions under which to evaluate the strategies identified, 
3. To develop a framework through which return on investment across the identified strategies can be evaluated and compared, 
4. To determine the factors that most influence returns, 
5. To determine the conditions under which returns are maximized,
6. To identify those strategies that maximize return on investment under the various representative community conditions identified, 
7. Via outreach efforts, to present our findings to community leaders and individual homeowners in order to receive feedback to refine methodology and findings, correct faulty assumptions, etc., and then re-present the revised findings, etc., and 
8. Via outreach efforts, to promote those strategies identified as yielding the greatest returns on investment.

Methodology

We propose to construct a discrete-time discounted net-present-value framework that accounts for the flow of costs and benefits over time. Specifically, the project will take a forward-looking "what-if" approach that identifies a set of representative property types, and estimates the magnitude of the three key benefits accruing from each mitigation approach available to them:

1. Wind policy premium savings based on mitigation discounts, based on the rate and discount structure currently in place in AL and MS for coastal wind-only policies offered by the state-run windpools, AIUA and MWUA, as well as those offered by a select number of private insurers;
2. Property value increases accruing to mitigation improvements, based on existing literature;
3. Reduced expected damage costs and/or claim deductibles due to mitigation undertaken, based on existing literature and estimates of relationships between storm strike probabilities, wind ratings on building material (roof, windows, doors, garage doors), and expected damages, similar to the methods employed by Burrus, Dumas, and Graham (2002), AIR Worldwide (2010), and others. 

The analysis would be estimated over a 30-year time horizon, i.e., the length of a typical home mortgage, using appropriate discounting, to give both a short- and long-run outlook of benefits and costs. The cost of adding hurricane wind resistance features to new construction is typically lower than for existing construction and can be rolled into overall construction costs. For this reason, we will consider scenarios for both new construction and existing properties. The geographic focus would be properties located in the coastal counties of Baldwin and Mobile in Alabama, and Jackson, Harrison, and Hancock in Mississippi. Analysis will consider properties both proximal and distal to the coastline.

Rationale

Coastal properties are a complex combination of amenity, value, and risk. The estimated insured values for coastal counties from Texas to Maine exceed $10.5 trillion, and Alabama and Mississippi’s coastal counties account for $118.2 and $60.6 billion of that total, respectively. Hazard mitigation is one potentially valuable tool to increase the resilience of properties by reducing expected damages in the event of periodic and catastrophic storm events. The benefits of mitigation can accrue at both the individual and community level. Convincing property owners of the benefits of mitigation so that they will undertake it can be challenging.  Perceived lack of affordability and/or lack of return on investment are two prominent reasons put forth to explain why property owners do not mitigate. Cost is especially challenging to minorities and low-income homeowners, who are also more likely to own especially at-risk properties.  

There is actually very limited extant research related to the costs and benefits of wind-hazard mitigation, and what does exist focuses on one potential benefit or another, but not the full suite of benefits simultaneously.  Burrus, Dumas, and Graham (2002) estimate least-cost combinations of mitigation activities for given levels of wind resistance based on reductions in expected damages, and analyze the tradeoffs between insurance purchase and mitigation. Kleindorfer and Kunreuther (1999) estimate the reduced cost of damages at the community level with both mitigation and insurance. These studies do not, however, consider the potential benefits of improved property values or reduced insurance costs.  Simmons and Kruse (2000); Simmons, Kruse, and Smith (2002); Dumm, Sirmans, and Smersh (2011); and Awondo et al. (2017) estimate the effect of mitigation and building codes on property values, but do not consider the benefits of reduced expected damages or reduced insurance costs.