---
title: what a source is worth paying for
canonical_url: https://ensurance.app/guide/what-a-source-is-worth-paying-for
markdown_url: https://ensurance.app/guide/what-a-source-is-worth-paying-for.md
subtitle: how an avoided loss becomes the most you should pay to keep what you depend on
category: nature-finance
---

# what a source is worth paying for

*how an avoided loss becomes the most you should pay to keep what you depend on*

**What is loss prevention?** Loss prevention is the work done before a loss to make it less likely or smaller: a sprinkler, a floodwall, a backup well, or keeping the floodplain and forest upstream that can slow the water. What that work is worth to you has a ceiling: the loss it would avoid, in present value, over the years you plan on.

In a store the phrase means stopping theft. Here it means the work above, aimed at a place you do not own.

The eight posts before this one each end on a bill: a [plant that flooded](/guide/the-loss-started-outside-the-property-line?from=guide), a [hospital on tanker trucks](/guide/a-hospital-cannot-store-a-watershed?from=guide), a [chip fab trucking in water](/guide/a-chip-fab-still-waits-for-rain?from=guide), a [ski area that lost a season](/guide/the-resort-never-owned-the-trees?from=guide). Each traced the loss to a source outside the property line. This post answers the next question: what should I pay to keep that source, and why pay at all?

The river valley, the forested watershed, the marsh, the aquifer and the lake were doing their work before the building went up, and they keep doing it whether or not anyone pays. The building leans on them, and so do its neighbors. **[Ensurance](/guide/how-to-save-money-with-ensurance?from=guide)** is built to give the living place an account, so the ones who depend on it can pay for its keeping. The account is not the place, and no account stops a storm.

:::johnson
**three owners, one source, three ceilings.** Each owner's ceiling is its own avoided loss in present value. In the example below, each comes out ahead paying a share, and none could justify the work alone.

[See the arithmetic this post builds on →](/guide/the-quote-beside-the-cost-of-doing-nothing?from=guide)
:::

*This post explains a method on invented numbers. It is not insurance, legal or tax advice.*

## the bill you pay, and the one you don't

You already pay for your gray sources. The water bill, the tap fee, the levee district assessment and the generator's fuel contract each arrive as an invoice that someone in finance has weighed.

The natural sources usually send no invoice. The forest above the intake, the floodplain that gives the river room before it reaches your site, the aquifer under the plan: none bills you, so none has usually been weighed. When a bad year comes, the loss can land on your bill anyway.

## six steps from an avoided loss to a price

### 1. name the bill the event would land on

Avoided capital spend, avoided operating cost, protected earnings, or kept insurability and cost of risk. Pick the bill you already pay or have budgeted; a smaller documented number beats a larger guess ([what ensurance saves you](/guide/what-ensurance-saves-you?from=guide)).

### 2. turn the event into an expected annual loss

One bad year is an outcome, not a rate. **Expected annual loss** is a model output: how often a loss happens times what it costs, averaged over a year. For a United States place, you can [read the Federal Emergency Management Agency's expected annual loss by peril for the census tract](/place?from=guide). It is a tract-level model figure: a lead, not your property's loss ([how an intervention lowers the loss](/guide/how-an-intervention-lowers-the-loss?from=guide)).

### 3. estimate what the work at the source can move

Run the same events twice, without and with the work, and read the difference. State it as a range, with the method beside it. Many sources have no such study yet. Ensurance does not compute it today either: our own intervention-attributable avoided loss is planned, not built. Until then the number comes from a modeler you hire or a partner's study.

### 4. take the present value: that is your ceiling

Turn the yearly avoided loss into one number over a stated term at your own discount rate. *The ceiling on what you pay is what the loss would have cost you.* Pay less than that, in present value, and you are ahead ([the quote beside the cost of doing nothing](/guide/the-quote-beside-the-cost-of-doing-nothing?from=guide)).

### 5. split it among everyone the source serves

A natural source rarely serves one owner; the properties it serves are its [serviceshed](/guide/what-is-a-serviceshed?from=guide). Each one that depends on it pays a share sized against its own avoided loss, never against someone else's ([split the bill for what lowers it](/guide/split-the-bill-for-what-lowers-it?from=guide)).

### 6. set the quote beside the ceiling, then ask who books it

Put the price of the work and your ceiling on the same clock: both in present value, or both a year at a time. Never set a yearly payment beside a ten-year present value.

Then ask a separate question: who recognizes the lower loss today? An insurer may keep you insurable more readily than it cuts your price ([how to lower insurance premiums](/guide/how-to-lower-insurance-premiums?from=guide)). A lender may or may not price it ([ensurance and your cost of capital](/guide/ensurance-and-your-cost-of-capital?from=guide)). Often the only one who books it is you, as a modeled avoided cost. That is still a benefit you can name, just not a discount.

## one source, three owners, three ceilings

An illustration on round numbers, not a quote for any place, reusing the worked example in [the quote beside the cost of doing nothing](/guide/the-quote-beside-the-cost-of-doing-nothing?from=guide): work at a source costs **$2,000,000 up front** and is modeled to avoid **$400,000 a year** in expected losses, net of continuing costs, for **ten years**, at a **5% discount rate**, with savings counted at each year-end and nothing left over at the end.

| measure | formula | result |
|---|---|---:|
| Annuity factor | AF(5%, 10) = (1 − 1.05^−10) ÷ 0.05 | 7.7217 |
| Present value of the avoided loss | $400,000 × 7.7217 | $3,088,694 |
| Net present value | $3,088,694 − $2,000,000 | +$1,088,694 |
| Benefit-cost ratio | $3,088,694 ÷ $2,000,000 | 1.54 |
| Break-even yearly saving (a year) | $2,000,000 ÷ 7.7217 | About $259,009 a year |

Now say the $400,000 is not one owner's saving. It is the sum across three that lean on the same floodplain upstream: a plant on the river, the water utility whose intake sits beside it, and the carrier that insures the plant. Each figure is that owner's own net avoided loss, from its own bills.

Count each loss once. The plant counts only what its policy would not pay: the deductible, the waiting period, the earnings it does not insure and any cleanup the policy leaves out. The carrier counts the claims it would pay. Same flood, two halves, no overlap.

Each owner's ceiling is its own avoided loss times the same 7.7217. The work is split in proportion to each one's avoided loss, so the shares are $1,000,000, $600,000 and $400,000. All three columns below are present values.

| who depends on the floodplain | ceiling | share of the work | ahead by |
|---|---:|---:|---:|
| The plant: uninsured earnings and uncovered cleanup | $1,544,347 | $1,000,000 | $544,347 |
| The water utility: treatment and dredging | $926,608 | $600,000 | $326,608 |
| The carrier: expected claims on the plant | $617,739 | $400,000 | $217,739 |
| **Total** | **$3,088,694** | **$2,000,000** | **$1,088,694** |

The same split a year at a time, if someone fronts the $2,000,000 and each owner repays its share over the ten years at the same 5%. This is a hypothetical, not an offer. Both money columns below are yearly.

| who depends on the floodplain | avoided loss a year | share paid a year |
|---|---:|---:|
| The plant | $200,000 | About $129,500 |
| The water utility | $120,000 | About $77,700 |
| The carrier | $80,000 | About $51,800 |
| **Total** | **$400,000** | **About $259,000** |

A proportional split gives every owner the same $1.54 of avoided loss for each $1 it pays.

Now read the ceilings again. The largest, the plant's $1,544,347, is below the $2,000,000 the work costs, so no one owner here could justify the work alone. That can be one reason a source that serves many owners goes unpaid: each owner checks the work against its own bill, and each bill can come up short.

The $400,000 is invented. A real number needs the with-and-without run in step 3 and each owner's own invoices, with a range. If the honest low end of the combined range sits below about $259,000 a year, the case does not hold at that end.

## why pay when a neighbor could ride free

Say the carrier stays out. The plant and the utility together have a ceiling of $2,470,955, still above the $2,000,000 cost. Split between the two in the same proportion, the plant's share rises to $1,250,000 and the utility's to $750,000, both still under their ceilings. The work can go ahead, and the carrier keeps a benefit it did not pay for: the [free rider standing on the source](/guide/the-free-rider-is-standing-on-a-keystone-parcel?from=guide).

Three reasons an owner pays anyway:

- **Your share is weighed against your own bill.** The plant is ahead at $1,000,000 or at $1,250,000. A neighbor's choice changes the size of your share. You still come out ahead as long as the work goes ahead and your share stays below your ceiling.
- **Waiting keeps the loss the work would have avoided.** If every owner waits for the others, the work is not done, and each keeps that modeled loss on the books.
- **No owner is asked to carry another's loss.** A share above your own ceiling is the signal to stop. Then the work is scaled down, a grant fills the gap, or the case waits.

## where ensurance sits

Ensurance is not insurance and pays no claim ([what ensurance cannot do](/guide/what-ensurance-cannot-do?from=guide)). It is built to hold the split: one account for the source, each owner paying in from its own budget, and a record of the source's condition that each owner can check before it pays in again. Its quote paths come from a premium model that is still a draft; [the quote beside the cost of doing nothing](/guide/the-quote-beside-the-cost-of-doing-nothing?from=guide) works them on round numbers, labeled draft model, illustrative. No ensurance saving has been realized yet.

## start with one number

1. [Read the expected annual loss for your place](/place?from=guide) if it is in the United States.
2. Write down the one bill the last event landed on, from your own records.
3. Name the source behind it, and [look for its account](/explore?from=guide).
4. When you want help, the [services page](/services?from=guide&topic=outside-the-property-line) lists what we offer, from a valuation of one source to a regional analysis, or you can [talk to someone who can run the numbers with you](/contact?from=guide&topic=outside-the-property-line).

How this reads for a [company](/solutions/corporations?from=guide&topic=outside-the-property-line), a [carrier](/solutions/insurers?from=guide&topic=outside-the-property-line) or a [utility](/solutions/utilities?from=guide&topic=outside-the-property-line).

## frequently asked questions

### what is loss prevention?

Work done before a loss to make it less likely or smaller, from a sprinkler to keeping the floodplain upstream. In retail the phrase means stopping theft. Its value to you is capped by the loss it avoids, in present value.

### how much should i pay to prevent a loss?

No more than the present value of your own expected avoided loss, over a stated term at your own discount rate. In the example above, the plant's ceiling, in present value, is $1,544,347: its $200,000 a year of avoided loss, discounted over ten years at 5%. When others depend on the same source, pay a share sized to your own loss, not the whole cost.

### what if nobody has modeled the source?

That is the usual case. Start with the bills you already pay or have budgeted, read the tract-level expected annual loss as a lead, and ask a modeler for a with-and-without run before anyone is asked to pay. Ensurance's own calculation of what an intervention removes is planned, not built.

## sources

[Ensurance guide: the quote beside the cost of doing nothing](/guide/the-quote-beside-the-cost-of-doing-nothing?from=guide) — The $2,000,000, $400,000 a year, ten-year, 5% worked example and its present-value arithmetic, reused here. The tract-level expected annual loss in step 2 is the Federal Emergency Management Agency figure that the [place door](/place?from=guide) reads.

## the series

1. [the loss started outside the property line](/guide/the-loss-started-outside-the-property-line?from=guide) — read first
2. [a hospital cannot store a watershed](/guide/a-hospital-cannot-store-a-watershed?from=guide)
3. [a chip fab still waits for rain](/guide/a-chip-fab-still-waits-for-rain?from=guide)
4. [the factory was sound. the floodplain was full](/guide/the-factory-was-sound-the-floodplain-was-full?from=guide)
5. [the office park stands where the marsh was](/guide/the-office-park-stands-where-the-marsh-was?from=guide)
6. [a lot is not a home until the water is promised](/guide/a-lot-is-not-a-home-until-the-water-is-promised?from=guide)
7. [the resort never owned the trees](/guide/the-resort-never-owned-the-trees?from=guide)
8. [every ship spends water the forest gathered](/guide/every-ship-spends-water-the-forest-gathered?from=guide)
9. [what a source is worth paying for](/guide/what-a-source-is-worth-paying-for?from=guide) — this post
10. [how to map what your property depends on](/guide/how-to-map-what-your-property-depends-on?from=guide)