An Agent-Based model for Physical Climate Risk, Insurance Claim Management, and its Impact on the Real Estate Market

Abstract

Extreme weather events can cause significant damage to properties and infrastructure. One of the most impactful events is heavy rainfall, which can result in either fluvial or pluvial flooding, causing damages both inside and outside to properties. The goal of this thesis is to understand the influence of heavy rainfall events on the evolution of commercial property values in urban areas in the Netherlands. Financial institutions, such as the ING REF (Real Estate Finance) department, are interested in determining whether their portfolios are resilient to extreme weather events, including heavy rainfall, so they can take preventive measures where necessary. In this research, we introduce an Agent-Based Model (ABM) that allows us to observe and analyze the influence of heavy rainfall on residential property prices in the commercial real estate market. Furthermore, the model examines the impact of key financial metrics in the commercial real estate market (CRE), including the loan-to-value ratio. Finally, the model analyzes various market dynamics by introducing several buyer-seller ratios within the model. The ABM is constructed with real- world data and assumptions from the ING REF department. Within the model, the following agents are represented: buyers, sellers, inactive agents (those that do not qualify as sellers or buyers), properties, and a single bank representing the ING REF department. The model allows for separate simulations of different urban cities. The final findings identified that the heavy rainfall event itself does not pose a significant risk to property prices. However, increasing the loan-to-value ratio from 55% to 65% results in property prices also increasing rapidly over the next three to five years. Furthermore, results show that in a commercial real estate market where there are more long-term sellers than buyers, a stable market is more likely to emerge. Property prices become more resilient to external shocks, such as heavy rainfall events, creating a safer environment for investors.