Assessment of Physical Risk from Flooding and its Financial Impact on Loans
Angel Lane Partners · 2024-08-01
Physical climate risk sits in a mortgage book unpriced: two identical properties are underwritten the same way whether or not one of them floods. This paper sets out a methodology running from the coordinates of a property through to the expected loss on the loan secured against it and works it through on a UAE flood case study.
Main contributions
- Exposure identified by analysing the geographical location of each property alongside historical records of extreme weather events.
- Hazard measured through event-based models producing spatial distributions of event intensity, with high, medium and low thresholds calibrated on historical rainfall. In the UAE, monthly rainfall above 30mm is classified high risk, and below 10mm low risk.
- Geo-scaling applied, mapping latitude and longitude to real locations automatically and retrieving state and country, so hazard data lands at the precise property and a whole portfolio can be assessed without address-by-address work.
- Vulnerability modelled per property on construction materials, elevation and build quality, with damage measured directly in monetary terms and carried through property value indices into probability of default and loss given default.
- Expected loss calculated as property value multiplied by percentage devaluation and the marginal annual probability of the event, with projections aligned to CMIP6 SSP scenarios and NGFS pathways downscaled to match.
- A UAE flood use case worked end to end on a loan portfolio, from coordinate mapping through hazard and vulnerability to loan-level loss.
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