History-making hurricanes in the U.S. would come with much greater price tags if they happened this year, according to a recent analysis.
Risk management and modeling firm Karen Clark & Company examined data from past hurricanes and identified ones that would cost $10 billion or more in insured losses today.
KCC examined the nearly 180 hurricanes that have hit the U.S. since 1900 and determined that 28 of those storms would result in $10 billion or more in insured losses in 2012 given the greater number, size and cost of structures in their paths.
The 1926 Great Miami Hurricane tops the list with an estimated $125 billion loss if it happened today. The two deadliest hurricanes in U.S. history, the 1928 Okeechobee Hurricane and the famous Galveston storm of 1900, would be the next costliest at $65 billion and $50 billion, respectively.
Two other Florida storms, the 1947 Fort Lauderdale Hurricane and 1992’s Hurricane Andrew are also estimated at $50 billion. Rounding out the top loss producers are 1915’s Galveston ($40 billion), 2005’s Katrina ($40 billion), the 1938 Great New England ($35 billion) and 1954’s Hazel and 1965’s Betsy—both are estimated at $20 billion.
Hurricane Donna in 1960 affected the entire East Coast from Florida to Maine and would likely cause a $25 billion loss today. The remaining 17 storms on the list range from $10 to $15 billion each.
“It’s clear many hurricanes that struck the United States in the earlier part of the 20th century would cause orders of magnitude more damage today,” Karen Clark, KCC president and CEO, said in a statement. “This is due not only to an increased density of structures in coastal regions, but also to changes in construction practices that have resulted in larger and more expensive buildings. Even a storm as recent as Hurricane Andrew, which struck 20 years ago this month, would be three times as costly today.”
The report explains why other sources of information for historical hurricanes tend to underestimate what the insured losses would be today. For example, other sources adjust the original losses by the general rate of inflation to bring the numbers forward to current day values.
This ignores the impact of increasing population, larger structures and the fact that building square foot construction costs tend to rise faster than the general rate of inflation. For example, simply adjusting the original Hurricane Andrew loss for inflation results in a current day estimate of only $22 billion (according to the Insurance Information Institute) versus $50 billion when these other factors are considered.
“We conducted this study because our clients asked us to provide historical event information as another tool they can use to assess their catastrophe loss potential,” Glen Daraskevich, KCC senior vice president. “Researching the various data sources we found incomplete and conflicting information, which led us to compile and thoroughly evaluate all of the sources. Our methodology built on previous work which we extended and enhanced to develop a credible and reliable estimate for each historical storm.”
Since each data source has limitations, developing robust estimates of the insured losses from historical hurricanes required multiple tools and data sources including knowledge of current property values, the size and extent of the hurricane windfields and historical loss information.
For this study KCC combined approaches, gathering and cross-referencing information, modifying that information as necessary to ensure reliability and used it to estimate the losses for each hurricane.
The report indicates the U.S. can expect a hurricane loss of $10 billion or greater once every four years on average. This equates to a 25 percent probability this year. A $50 billion hurricane loss has almost a five percent probability this year.
“As this and our previous studies have shown, large hurricane losses are possible along the entire Gulf and East coasts,” Clark said. “This information is useful for many purposes including better understanding the magnitude of potential catastrophe losses in different regions, benchmarking the model output and assessing the value of certain risk transfer options such as industry loss warranties. Because catastrophe losses now dominate many of the property lines, the more credible scientific information that can be brought to bear on risk management decisions, the better.”
