What do storms “cost”? A look at #Alberto

The National Hurricane Center has issued its last forecast for Subtropical thingee Alberto.  Here is the Svarog/Perun model impact estimate based on the 5am Tuesday 29 May track.  Also noted is the forecast track from the 26th.  Despite the fact this was a disorganized blob that wasn’t very tropical, and “reformed” several times, NHC did a good job on the track.  Their intensity estimate was too high, the original thinking is Alberto would be just below hurricane strength at landfall whereas it was barely tropical storm force, but given the holiday weekend, and the real potential for strengthening if the storm transitioned to a more tropical structure, the NHC forecast from Friday was not unrealistic.

So how much does a storm like Alberto “cost?”  That’s a tough question, and to some extent a matter of perspective, so this is a long post but hopefully interesting.  Unfortunately insurance industry terminology drives much of the discussion around natural disasters.  So the term “loss” is commonly used.  But that is misleading – certainly it’s a loss to the insurance company bottom line (although paying claims is sort of why they exist!), but it’s a “gain” for the contractor who gets the work to do the repair.  It’s a partial reimbursement for the homeowner or business, because of course there is the deductible and expenses that are not covered, much less costs to governments, the uninsured, and so forth. This is further complicated by the fact that flood “losses” are not covered by private insurance at all in the US, rather, it is covered by the Federal Government’s National Flood Insurance Program (NFIP).  Specialized coverage like business interruption insurance is complicated, and not often carried by small businesses.  So more often than not, insurances “losses” are actually not reflective of the total impact of a storm.  In fact, since the mid 1990’s (after the shock to the industry of hurricanes Hugo and Andrew, as well as earthquakes in California), deductibles and exclusions have risen dramatically, and the total share of the impact of a storm borne by the insurance industry has dropped.  The industry covered about 60% of the costs of storms like Andrew, Hugo, and if you include NFIP, even Katrina was over 50%.  But the coverage of recent major storms has been between 20 and 40 percent, and for weaker storms 10% or less.  We think that the amount covered by all forms of insurance of last year’s Harvey was less than 30%, and for Irma not much better.

What about just using repair and replacement costs, irrespective of insurance?  Well, even that is complicated.  Take the case of a small beach home build in the 1960’s.  If it suffers more than 50% damage, it cannot be rebuilt as it was, rather, it must be rebuilt to modern regulatory standards – that means it must be elevated, higher wind standards, and so forth.  So that $150,000 cottage is replaced by a $400,000 structure, or worse it and its neighbors are replaced by a multi-million dollar condominium. So what did the storm “cost,” $150k, or $400k, or more?  Depends on your perspective.  And of course that doesn’t include lost wages, revenues, and other economic impacts.

As a side note, we have seen this happen across the coastline in the southeast, that after a storm inexpensive beach cottage communities are replaced by condos and McMansions.  This is an unintended consequence of forcing higher construction standards and mandatory flood elevations on the immediate coast: while it might make structures more resilient, it also drastically increases the value of property at risk. The net effect is to actually increase storm costs!

As noted above, one persons “loss” is another persons “gain.”  Strictly speaking, unless your bars of gold are buried and you lost your map, most storm impacts are not “losses” in a macroeconomic sense, but redirected spending.  Instead of taking that vacation in the south of France, your insurance executives are having to slum it on Waikiki 😛  and your local roofing contractor gets to hire some part time help and buy a new boat 🙂 OK, that’s a little jaded, but you get the point.  What natural disasters do is change where the money flows and if/how/where it is invested, not the total amount of money in the system except in rare cases when government print money to increase spending (which has other negative impacts).  This leads some economists to talk about a “disaster stimulus”.  That is wrong in my view for a variety of technical reasons that only an economist would stay awake to hear, but in simple terms, storms take the intelligence out of the system and forces spending in ways that would not occur otherwise.  For example, instead of expanding my business, which would improve my community, I may be spending the same amount of money (or likely more) to just get back where I was.

So what exactly are we at Enki estimating, and how do we come up with an estimate?  Our goal is to estimate the economic impact of the storm.  By “economic impact,” we mean the value of redirected spending that is not recovered by short term displacement.  For example, grocery stores often see a ‘bump’ just before as storm as we stock up on Cheetos and Mountain Dew (hey, we’re scientists here; good nutrition is for sissies).  During the storm they see a “loss”, and see a bump afterwards as people buy stuff they delayed getting due to bad weather.  For the oil and gas industry, we don’t count the cost of “shut in” production unless it is not compensated for via increased production after the storm passes or from other sources.  So you can see it’s already not simple.  We start with physical damage and replacement costs.  That is somewhat straightforward – the computer models that estimate such things are actually pretty good.  We add in physical costs of infrastructure – stuff that tends to be overlooked, such as replacing signs, street lights, and so forth that local governments are often stuck with.  Cleanup costs are included, and can be a significant expense to both government and the private sector.  We then delve in to things like permanently lost wages (which hits hourly workers especially hard), and service industries.  Extra transport costs, and so forth come in to play.  The models are thousands of lines long and even take in to account the time of year and days of week of the impacts – very important for a storm like Alberto.

So given all that, our models are currently estimating the economic impact of Alberto to be somewhere around $700 to $800 Million.  Insurance based estimates of the “cost” of Alberto will undoubtably be small.  With high deductibles, most of the impact due to lost revenues or flood damage, the insurance industry share will certainly be less than 10%.  NFIP will get a bit more, but the vast majority of the impacts will be to small businesses that took a hit in the form of decreased income over the holiday weekend.  For comparison, we ran the same scenario two weeks earlier, before school is out, and the impacts were under $150 Million.  Two weeks later (which is in to the summer Travel season in Florida) and it is nearly $400 Million.  So for a tourist laden area like Florida, timing is everything …

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.