The Population Cost

On March 2, 2012, tornadoes ripped through 10 Southern and Midwestern states, killing 39 people. Fueled by a warm winter, the storms leveled neighborhoods and in a few cases, obliterated entire towns. At this writing, the National Oceanic and Atmospheric Administration (NOAA) estimates a total of 42 tornadoes were recorded that day, although numbers are expected to climb as high as 100.

Storms are turning more deadly, it would seem. According to data from NOAA, the number of events exceeding $1 billion in damages has spiked from four events in 2010 to 14 events in 2011. Damages in 2010 were in the $50 billion range. In 2011, that number skyrocketed to $200 billion.

Why, instead of brushing by metropolitan areas, are tornadoes taking a direct path through towns, destroying entire communities in a few short minutes? No clearer was this demonstrated than in Joplin, Mo., where a tornado struck in 2011, killing 160 people and wiping out nearly one-fourth of the town. The final expected insurance bill for the storm is about $2.2 billion.

Likewise in Greensburg, Kan., where in 2007 a tornado leveled the town of 1,574 people, killing 11, damages were $260 million, but the real cost was to the community. More than half the residents had to relocate rather than rebuild.

Can the increase in devastation and cost be blamed on more violent weather patterns? Not necessarily, say the experts. In fact, there are enough human and economic factors contributing to the rise in storm damage to say that perhaps weather and natural events aren’t necessarily to blame at all.

For example, a 2000 U.S. Geological Survey shows that New Orleans is sinking at a rate of one-third inch per year. Warnings had been up long before Katrina came to town about the city’s potential for disaster should a Category 4 or greater hurricane make a direct hit on the city, which is effectively sitting at the bottom of a fishbowl. When Katrina hit New Orleans, it was a Category 3 storm.

While many continue to point at failures in the emergency response systems and post-Katrina federal response, the crux of the problem was that the city was, and remains, exposed daily to flood risk not from hurricanes, but from damage to the flood walls that sit above the city, the very walls that were breached immediately following Katrina. Katrina became the costliest hurricane in U.S. history, coming with a damage price tag of $108 billion.

Much of the increase in losses from perils seen over the past three to four decades is due to socioeconomic factors in the United States, said Mark Bove, senior meteorologist in the Risk Accumulation Department at Munich Re America. He said that as populations move toward coasts and southern locales, that exposes a greater population to hurricane and severe thunderstorm events.

Urban and suburban sprawl are also factors, Bove said. With growing populations come dense accumulations of exposure that are more susceptible to the impact of storm damage. “A tornado that 20 years ago would have gone over an open field is now hitting a new residential development,” he said.

Increased property values, as well as the increase in real property values and accumulation, also have contributed to higher claims payouts. So has the amount in personal property, as people acquire more high-ticket items and electronics. Electronics in particular, Bove said, have contributed to a rise in lightning-related loss.

It’s also about where we build, Bove said. “We have a tendency to build in coastal areas that are vulnerable to storm surge and high winds due to hurricanes, and we also continue to build in flood plains, as well.”

Moreover, some state building codes do little to improve the situation. “Building codes in many states are not sufficient to protect homes from relatively weak windstorms, and some don’t have statewide residential building codes at all,” he added.

The state has to enforce the rules it puts in place. However, enforcement hasn’t always been consistent, leading to more exposure.

According to the Institute for Business and Home Safety (IBHS), while some coastal states are doing a good job of adopting and enforcing stronger building codes, some are falling far behind.

The IBHS report, titled “Rating the States: An Assessment of Residential Building Code and Enforcement Systems for Life Safety and Property Protection in Hurricane-Prone Regions,” said five of the nation’s most vulnerable states garner less than a 50 percent rating in areas such as adoption, enforcement and contractor licensing requirements. Of the 18 coastal states measured, only Florida, Virginia, and New Jersey scored higher than 90 percent (95 percent, 95 percent and 93 percent, respectively) on the IBHS scale (See “Room for Improvement” on page 30).

Steve Hatch, chief claims officer at Zurich North America Commercial, sees population density along the coastlines as areas of concentrated vulnerability. With 139 million people exposed to storm damage and flooding, the effects on claims costs are significant. Hatch thinks it’s a combination of the increasing costs, frequency and magnitude of storms.

“We are in a period of heightened severe weather activity as evidenced by the recent serious tornado outbreak which looks similar to what we experienced in 2011,” he said.

Supply chain interruption is a cost, he said, as well as demand on much-needed supplies and qualified repair and remediation contractors.

Volume, he said, drives cost. “The challenge is what would have been a less-costly claim becomes more costly and complex because of the time it takes to get even the basic repairs done.”

He uses the example of Katrina, where repairs had to wait until water was channeled away from damaged properties and business and homeowners returned to an evacuated and devastated city with limited utilities and municipal support.

Still, not all ills can be traced to population shifts.

Russ Opferkuch, managing director of Aon Global Risk Consulting, thinks the increase may be slightly overstated. “Are exposures truly increasing or is it that we’re recognizing and quantifying them better or differently?” he asked. “Or is it that things like FEMA flood zone maps are being updated and areas that weren’t in flood zones before are now?” He believes these inherent changes are in part showing up as increased exposures.

As Hatch said, preparedness is evolving, as well. As new twists and experiences occur, adjusters add to their best practices and build that experience into their models. Adjusters, he said, have to be able to react quickly, be flexible in handling claims and have specialized knowledge of CATs, including how to communicate with customers when there are power shortages and limited access to telephones or email.

“As an industry, if we’re not able to react quickly to that changing environment, it becomes more complicated for our customers and the industry,” Hatch said.

Richard Pankhurst, head of claims for PriceWaterhouseCoopers, sees preparedness improving, as well. Pankhurst, who is an expert in flood research, particularly in Australia, said government social cost benefit analyses can be used to create regulations that keep flood areas from being used in ways that could create high losses.

That regulation, along with pricing, helps. Pankhurst said the insurance industry’s supplying of claims history and data has helped the government with the creation of these tighter regulations. He said that pricing of insurance products is another way the industry controls people moving into highly exposed areas.

In his ideal world, communication would be at the core of any disaster plan.

“If I had communications at my fingertips, the ability to understand and have access to policy information, all the tools I’d need as a claims adjuster, better access to a repair network, mobilization of people in the field as quickly as possible, that to me would be the ultimate,” he said.

There’s already a great response by some insurers, Pankhurst said, with companies putting buses with computer stations, cell phone capabilities and satellite uplink capabilities, speeding the claims gathering and response efforts. “The insurance industry has responded in a really nice way with these catastrophe teams, plus this is how the industry can be a value-added part of the economy — just by helping people.”

Hatch said the problem goes beyond national borders. Disasters in other parts of the world can create costly claims in terms of supply chain and business interruptions. The response, Hatch said, must be the same.

“When you think about an earthquake or a hurricane, there can economic impacts worldwide regardless; it doesn’t really matter where it happens,” he said. “For a global insurer like Zurich, many of our customers in North America were impacted by the tsunami in Japan. Manufacturers, for example, had significant interruptions in their supply chains. It really demonstrates our global economy and how interconnected commerce is today.”

Pankhurst agrees. He said the best response comes from an increased awareness on the ground by everyone involved. “Around the world, the key to disaster recovery is to get the right people on the scene as quickly as possible.”