Study: Hurricane Andrew Three Times as Costly in 2012

There have been 28 storms in U.S. history since 1900 which if they were happen today would each cause $10 billion or more in insured losses.

Experts at catastrophe risk management firm Karen Clark & Co. (KCC) said they examined the nearly 180 hurricanes that have hit the country since 1900 and determined that 28 would result in $10 billion or more in insured losses in 2012 given the greater number, size and cost of structures in their paths.

Hurricane Andrew, which struck Florida 20 years ago this week, would be three times more costly today than it was in 1992.

The 1926 Great Miami Hurricane tops the list with an estimated $125 billion loss. The two deadliest hurricanes in U.S. history, the 1928 Okeechobee Hurricane and the famous Galveston storm of 1900, are 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 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.

“It¹s clear many hurricanes that struck the United States in the earlier part of the 20th century would cause orders of magnitude more damage today, said Karen Clark, president and CEO, KCC. “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.”

According to the KCC report, 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. KCC experts say 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.

Glen Daraskevich, senior vice president, KCC, said the firm conducted the study because clients wanted historical event information as another tool to use in assessing their catastrophe loss potential.

“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,” Daraskevich said.

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,” said Clark. She said the information is useful for 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 (ILWs).

“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,” said Clark.

The report is available at www.karenclarkandco.com.