Assessment of the losses due to business interruption caused by large-scale floods

The economic consequences of floods, both in the form of material damage and losses due to business interruption, can be large. This paper presents a comparison between two approaches to determine the losses due to business interruption caused by large-scale floods. A model (HIS-SSM) containing a damage function approach and an Adaptive Input-Output model (ARIO) are applied to a hypothetical flood in The Netherlands. The results of the case study are compared to the costs of recent large-scale floods in the US and in Asia. The comparison shows that the losses due to business interruption are underestimated by HIS-SSM. The results of the ARIO model are in line with the figures from recent large-scale floods, but they depend strongly on how material damage is transformed to a production capacity. Furthermore, both models underestimate the losses due to business interruption if a unique object is flooded. We recommend to perform more validation studies with HIS-SSM and possibly replace the damage function approach with an input-output model approach for computing losses due to business interruption. Moreover, we recommend to perform more research on the relation between material damage and production capacity and to determine the consequences of flooding of unique objects on the level of the individual firm