AllianceBernstein: When Disaster Strikes: Gauging the Investment Risk of Natural Hazards

NORTHAMPTON, MA / ACCESSWIRE / December 18, 2023 / AllianceBernstein

Patrick O'Connell, CFA| Director-Fixed Income Responsible Investing Research
John Huang, CFA| Director-Fixed Income Responsible Investing, Data and Technology
Larry Bellinger, CFA| Director-Municipal Credit Research
Sam Wilamowsky, CFA | Research Analyst-Securitized Assets

Investors need to understand the potential physical damage from natural hazards before they can assess their financial implications.

From hurricanes to earthquakes to droughts, natural disasters are becoming more numerous, extreme and costly. To assess the potential financial damage, investors must better understand physical risks at the local level. That's the goal of a collaboration between AB and the Columbia Climate School.

Understanding Physical Risks from Natural Hazards

In 2016, the Columbia Climate School's National Center for Disaster Preparedness created a Natural Hazards Index, a wide-ranging assessment of natural hazard exposures across US states and counties. The intent was to help US households, communities, and public health and emergency management practitioners prepare against natural disasters.

AB subsequently worked with Columbia on an upgraded 2.0 version, released in early 2023, that can generate a detailed interactive map showing natural hazard exposures across the US (Display). It can drill down to any of the 73,057 underlying census tracts that comprise the 3,143 US counties.

The Natural Hazards Index captures the frequency and magnitude of 14 different natural hazards, including coastal flood, damaging wind, drought, earthquake, extreme heat, floods, hail, hurricanes, landslides, tornado, tsunami, volcano, wildfire and winter storms.

It draws on a vast range of data from four different categories: historical data, based on prior events; probabilistic or predictive data, providing some percentage likelihood of an outcome; deterministic data, pointing to an expected outcome given a set of conditions; and a model data set, which uses multiple explanatory variables to approximate selected outcomes. These data are continuously updated.

The result is a non-ranked, summative index with individual hazard scores from one (very low) to five (very high) and, where multiple hazards exist, summative hazard scores as high as 42. The index has made a significant contribution to understanding evolving physical risks to people and property and has greatly assisted the work of first responders.