Quantifying the Economic Impact of Floods on Businesses with a Network Analysis

Abstract

Climate change and urbanization are intensifying economic losses from natural hazards, particularly floods, making robust risk assessment crucial. However, traditional risk assessment frameworks fall short in representing the full costs of natural hazards, as they typically focus only on direct damages, like property damages, neglecting the indirect tangible damages. One of the key objectives of this research is to quantify the indirect economic impacts resulting from business interruption (i.e. reduction in production due to physical damages in areas directly affected by the hazard) and contingent business interruption (i.e. production losses of suppliers and customers of companies directly affected by the hazard), and the associated macroeconomic impact. This study addresses this gap by employing a multidisciplinary approach, integrating network theory with traditional Input-Output (I-O) economic models. This integration not only enhances the representation of the interconnectedness inherent in socio-economic systems but also aids in quantifying the often-overlooked indirect effects of floods. The methodology integrates high-resolution input-output tables, geolocalized firms and spatial information on critical infrastructures, like the transportation network. This comprehensive approach not only provides a detailed view of the cascading economic effects, but it could also enhance traditional I-O models by incorporating information on geographical substitutability. The detailed understanding of economic dependencies and network vulnerabilities is crucial in assessing the full costs of floods. Applied to a significant Italian region recently struck by a severe flood, the approach allows for the mapping of the region's economic structure as an interconnected network of economic sectors. Network theory measures and tools are then employed to identify central and vulnerable nodes, enabling a detailed analysis of shock propagation within supply chains. The findings of this research are not only critical for policy-makers and urban planners in adopting more effective flood risk management strategies but also offer valuable insights for the insurance sector in terms of understanding and mitigating collective risk. In conclusion, this study advocates for a shift from traditional risk assessment models towards a more holistic, systemic approach, thereby enhancing societal resilience to the multifaceted impacts of natural hazards.