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Dam collapse highlights wider concerns over infrastructure risk

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The recent emergency efforts to repair the crumbling spillway of California’s Oroville Dam dramatically underscores a critical need for risk managers to focus on infrastructure exposure, industry analysts say.

While commercial organizations have limited influence on infrastructure policy, they need to consider the state of local facilities and projects when they analyze their business interruption exposures and assess their real estate needs, they say.

And as public/private partnerships are used more frequently to repair and construct infrastructure projects, the insurance industry needs to develop more sophisticated risk financing tools.

The Oroville Dam, located in Northern California’s Sierra Nevada foothills, caused widespread concern on Feb. 7 when a crater appeared in the dam’s main spillway after a period of rain during ongoing flood control release.

Evacuation orders were issued for about 200,000 residents along the Feather River, although they were lifted a short time later. Estimates to repair the damage have run as high as $200,000.

“The erosion that appeared at the head of the emergency spillway several days after water began to flow into it last week was unexpected,” Ed Wilson, Sacramento-based spokesman for the California Department of Water Resources, said in an email. “We will complete a comprehensive assessment of the incident to determine exactly what caused the erosion, and we are armoring the emergency spillway in the event it should it be needed again.” 

Both President Donald Trump and Senate Democrats have proposed spending $1 trillion over the next 10 years to upgrade the nation’s infrastructure. In 2013, the American Society of Civil Engineers, which gave America’s infrastructure an overall rating of D+ for the condition of the nation’s roads, bridges, dams, ports and other vital areas, said a $3.6 trillion investment will be needed by 2020.

The society, which issues the report every four years, is scheduled to release the latest edition on March 9.

The society said in the 2016 report “Failure to Act” that from 2016 to 2025, each household will lose $3,400 each year in disposable income due to infrastructure deficiencies as costs are passed on to consumers; and if not addressed, the loss will grow to an average of $5,100 annually from 2026 to 2040, resulting in cumulative losses up to almost $34,000 per household from 2016 to 2025 and almost $111,000 from 2016 to 2040.

“The rate of economic growth and development is outpacing our infrastructure investment by about a factor of two,” said Louis Gritzo, vice president and manager of research with FM Global in Norwood, Massachusetts. “A lot of infrastructure, especially in the Northeast Corridor is beyond its designed lifetime, and there’s not been a reinvestment in that. And what that means, of course, is that it’s brittle — any little stressor is going to break that infrastructure, and with the load on it being higher than ever, then the consequences are going to be more severe.”

Mr. Gritzo said risk managers are naturally concerned about infrastructure-related threats to the supply chain and business continuity. He also stressed the importance of siting a location.

“There’s the opportunity for risk managers to be a part of that discussion,” he said, “whether it’s a new facility, whether it’s merger and acquisition, and that’s really where I think a savvy risk manager can get a jump on the game. The smart, savvy siting of key facilities can significantly reduce the business risk. Don’t buy the cheap real estate; buy the good real estate.”

Howard Botts, chief scientist at analytics firm CoreLogic Inc. in Los Angeles, said that just two years ago, the Oroville Dam was only about one-third full, water was being rationed or cut off to farmers, and water rationing and restrictions were introduced in Los Angeles.

Overall, the biggest issue is increased climatic variability, Mr. Botts said, noting that there were six so-called 1,000-year rainfall events in 2016.

“I think we’re going to see drought and then intense rainfall alternating over a series of years,” Mr. Botts said. “I think the U.S. is in for much more impact from these natural weather events. And if you think about major U.S. businesses, there’s a tremendous amount of supply chain interruption that we’re likely to see.”

Adrian Pellen, senior vice president for infrastructure with Marsh L.L.C. in Chicago, said he anticipates growth in public-private partnerships for critical civil infrastructure like roads, bridges, highways and public transportation.

“The private sector will not only be taking on risk from a construction and design perspective,” he said, “but taking on financing risk, performance risk, often site condition risk and life cycle risk associated with these types of projects.”

Mr. Pellen also said he anticipates seeing more risk transfer tools outside of traditional property/casualty exposures, such as parametric derivatives, where products aren’t triggered by damage but by weather events, such as a certain volume of precipitation or temperature.

“These have been very useful in the context of infrastructure risk management,” he said. “Looking at airports, very specific budgets for snow removal, (and) looking at the Northeast a few years back when they had unprecedented snowfall, weather-triggered risk transfer products like derivatives or insurance can come in very handy to help offset snow removal costs, salting costs and the like."