The New ASTM Property Resilience Assessment Standard and Creating an “Evidence Base” for Both ROI and Insurance Premium Reductions
By: Albert J. Slap, President, RiskFootprint™
“As is prudent, owners/investors need to determine if there may be a positive ROI or Benefit/Cost in resilient retrofits. ROIs may include damage prevention, fewer business interruptions, greater tenant satisfaction, maintaining market values, and, last but not least, insurance premium lowering or stabilization in the future.”
The new ASTM Property Resilience Assessment (E 3429-24) is a “best practice” standard for a generalized and systematic approach for conducting a commercial real estate property resilience assessment (PRA). According to ASTM, the new standard (E3429) will be useful to real estate investors, owners, operators, lenders, and insurers who wish to better understand the natural hazards, including those made more extreme by changing climates, that may affect a (typically large) commercial, industrial, multifamily property. The PRA consists of three stages:
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Stage 1: Identifying the natural hazards likely to affect a property;
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Stage 2: Evaluating the risks posed by those hazards along with the capacity of the property to prepare for, adapt to, withstand and recover from those hazards; and,
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Stage 3: Identifying conceptual resilience measures to enhance property-level performance and recovery.
The PRA provides a way for decision makers to understand the physical climate risks that may affect a property, including on-site observations by an engineer or architect regarding the vulnerability of the building to those hazards, as well as identification of potential resilience measures that could improve the property’s ability to withstand and recover from hazards of concern. According to both ASTM and the Urban Land Institute, “The PRA described in E3429 is designed to accompany Phase I Environmental Site Assessment, as presented in ASTM Standard E1527; and the Property Condition Assessment, covered in ASTM E2018.” ASTM Press Release
One of the main purposes and uses of the ASTM PRA is to help the owners/investors in large properties determine if there is a need to invest in resilient (risk-mitigating) retrofits of the building or group of buildings. Typically, these properties may be “core assets” that have already been damaged by floods, natural hazards, or extreme weather or are currently at high-risk of damage and loss in the next event. As is prudent, owners/investors need to determine if there may be a positive ROI or Benefit/Cost in resilient retrofits. ROIs may include damage prevention, fewer business interruptions, greater tenant satisfaction, maintaining market values, and, last but not least, insurance premium lowering or stabilization in the future.
In some aspects of insurance risk management, if an owner reduces insured losses, then lower insurance premiums should follow. For example, if an office or apartment building has had insurance claims for flooding inside the building due to toilet leaks, and, the owner installs water sensors behind toilets that shut off water flow when they get wet then, the insurance provider will most likely lower future premiums accordingly. But, what if the lobby or parking garage of the same building has flooded due to tropical storms and heavy rainfall? What will the same insurance provider do or not do, if the owner proposes to install various types of barriers and flood-proofing on the building to stop flooding from the outside of the building, instead of from the inside? In the case of FM Global, that insurance provider has a publicly-announced program that provides “resilience credits” of 5% to its customers that have made risk-mitigating retrofits to their buildings. With other insurance companies, the answer to the above-question is not so clear.
FM Global Press Release
One sensible recommendation in the context of the ASTM Property Resilience Assessment is to consider bringing the building owner’s insurance agent and provider into the PRA process early on — at least before Stage 3 begins. By doing so, the insurance company can help the owner understand what benefits or ROI may possibly be offered as a result of resilient retrofit, if any. And, if there can be premium reductions, the insurance company may inform the owner what sort of “evidence base” is needed to support the reductions. For example, to create an “evidence base”, the insurance company may require the owner to hire a neutral, third-party to: (1) monitor the construction of the resilient retrofits; (2) certify that the work was done and done properly using the specified materials and products; and, (3) even field testing the retrofits (as applicable) to determine that they do, in fact, work properly. Much of this inspection and certification work would take place during the PRA Plus3™ or implementation phase of the project.
In the PRA process, the building owner will likely be shown a number of feasible resilience measures and costs that vary depending on the “event severity” levels applicable to the building. In the example below, approximately a dozen feasible resilience measures were identified to protect the building from hurricane storm surge flooding. The inundation levels and, consequently, the feasibility of measures and the costs varied significantly with the event severity. So, the feasible measures and costs for Category 1 surge protection was much less ($250K) than the measures and costs for Category 5 surge protection ($10.5M) — as can well be expected.
Damage/Loss and Restoration Days “Before-and-After” Expected Flood Resilient Retrofit with 6-feet of Flood Protections
In fact, ASTM Property Resilience Assessment, E-3429, Section 9.11.1, Expected Benefits, provides that: “The PRA professional should describe the expected benefits of the resilience measures to the Stage 2 findings in order to demonstrate the expected difference between the current Stage 2 findings and the expected improvement after the resilience measures have been implemented.” This can be done during the PRA Stage 3 process by examining the potential benefits of various identified Feasible Resilience Measures and costs.
In an example of this process, a condo building’s garage was determined to be susceptible to damages from Hurricane Category 1-5 flooding and the building’s lobby from Category 5 storm surge because of its higher elevation.
In an ASTM PRA Section 9.11.1 “before-and-after” analysis of using a hypothetical 6’ flood barrier (as a feasible resilience measure), the percent damage shown in the table below for the FEMA 100-year flood is 8.4% of the $4.5 million replacement cost of the parking garage or $378,000 (in any year) – before any resilience measures are implemented. This damage and approximately 30-days of business interruption could be completely avoided with installation of a 6’ barrier.
The lobby floor (first finished floor) had an estimated replacement cost of $1.66 million. In a Category 5 storm, the damage to the lobby would be ~$210,000 (in any year) and 450 days of restoration days or business interruption. With use of a 6’ barrier, both the damage/loss to the lobby and the high number of restoration days would be avoided. The contents of the garage and the lobby would also be spared inundation in a 10-year storm by implementing a 6’ barrier. Note that a 6’ barrier stops damage from a FEMA 100-year storm, but not NOAA-modeled storm surges from Category 1 through 5 hurricanes.
Conclusion
The ASTM PRA process and the PRA Plus3™ establishes an “evidence base” that loss prevention measures have been properly implemented and tested. The Property Resilience Assessment provides an “evidence base” for better resilient retrofit decision-making and support for negotiations with insurance providers for lower and more stabilized annual insurance premiums and better coverage.
A final point — resilience is a process; not a destination.
Any capital expenditures made in the PRA and PRA Plus3™ process should be accompanied by appropriate operational expenditures to ensure that a building’s property management staff are properly trained each year to implement the resilience measures and emergency response plans in advance of hazard events….
