Given the wealth and population density in the Miami area today, the insured losses from an event like Hurricane Andrew- like the earlier forecasted Hurricane Irma (above)- is estimated to cost around $100 billion. As Irma passed onshore around Naples, FL the FT reported loss estimates between $20 and $65 billion. The devastation recently caused by Hurricane Harvey has a range of estimates: around $25 billion in insured losses and the Texas governor estimates near $200 billion.
Between, Harvey's estimated $25 billion in insured loss and Irma's $40 billion in insured loss we have ~$65 billion or $130 billion in estimated total economic damage.
For the most part, the nation relies on various insurance regimes for managing the financial component of disasters. As the nation prospers in general, disasters will necessarily become more expensive requiring higher insurance premiums to satisfy business sustainability requirements.
This poses a general problem for America because while the nation prospers in a general sense such prosperity is unequally distributed. It is increasingly difficult for the majority of Americans to meet insurance price demands.
In 1986, the insurance research group, All-Industry Research Advisory Council, investigated how the industry would handle the losses from two $7 billion hurricanes. Just a few years later the researchers could assess their conclusions when Hurricane Andrew caused $16 billion in losses. The loss rattled the industry, literally and figuratively, and the Florida government scrambled to find a compromise between industry demands for rate hikes and public demands for affordability.
The need to find balance spoke to a tenant of Florida and US economies- real estate development and mortgage lending. As many homeowners know, windstorm insurance (covering hurricanes) is required to obtain and maintain a mortgage. In many instances, so is flood insurance. If these types of policies become unaffordable, state and national economies run the risk of widespread foreclosures.
Since Andrew, residents of coastal states have reluctantly accepted volatility in windstorm insurance pricing. Volatility stems from market dynamics and the rapid pace in which insurers can absorb scientific information and develop unique and proprietary views of risk. These variations in risk estimates help insurers compete in the market.
Premium increases, limited catastrophic losses since Hurricane Wilma in 2005, and other market forces has resulted in a windfall for the global insurance industry. Swiss Re, a major reinsurance company, has given out special dividends to share holders to reduce the amount of cash on hand.
But such good fortune has also created a highly competitive and structurally changed global insurance market. Florida and its Citizens Property Insurance Corporation are significant players in the $25 billion catastrophe bond market. They derive international power from their influence on how global peak hurricane risk is defined and priced.
In order to stabilize the competition, a representative of the rating agency S&P Global notes, “You’d need to see a bigger cat (catastrophe) event to really have some impact on price.” Perhaps Irma presents such an opportunity.
We have arrived at a new turning point. How will the industry and government manage two $100 billion dollar hurricane events?
As insurance experts and environmentalists seek retreat from the nations vulnerable coasts, it seems unreasonable to expect a halt in coastal living as these are our major hubs of commerce. Indeed it is where most of us live.
Americans face a rate of income inequality last seen during the 1920’s. When even the cost of preparing for a hurricane (plywood, food, water and gas) is enough to overwhelm any family that is already walking a financial tight rope, it is absurd that the main policy option experts keep putting to on the table is increasing the cost of flood and wind insurance.
Consider a recent New York Times editorial explicitly blaming Congress for Harvey’s flooding of Houston because “policyholders and their elected representatives pushed back” against increases in insurance costs. That Congress heeds the demands of their constituency is a fundamental tenet of American democracy. Arguing that Congress ought not listen to the public and rather heeds the whims of insurers (and apparently the editors of the NYTimes) is an effort to swindle the public out of its participatory power in making decisions about risk priorities and preferred ways of community life.
Maintaining a stable, healthy insurance industry is important not as an end but as a means of maintaining stability in the social and economic fabric of American communities. But such stability does not currently exist.
Government needs to alleviate the burdensome income divide in the nation. Bringing the public to a more level playing field will improve our ability to equitably share the risks inherent in a prosperous society.
Finally, there is something disconcerting about tying markets to human suffering. Certainly worse, would be put in a situation where the money was not available to rebuild. What concerns me is that the current state of affairs seems to tie human suffering, and community development to the fickleness of investors' moods, profit seeking and the costs of doing business in global virtual markets.
Consider that, as Irma passed onshore around Naples, FL, the FT reported on how investors were becoming a bit skiddish in their cat bond activity. Perhaps Irma presented the type of loss that the S&P representative was referring to. But the miss on Miami and the subsequent weakening of Irma before making landfall had the FT reporting that insurers and investors were the up and up.
Both Irma and Harvey presented substantial flood losses that will mostly be the burden of the US government (i.e. the national public- the vast majority of which live in a "coastal" county). But what if it wasn't this way? What if every time it rained a bit too much or a storm came ashore just so, we had to watch investor reactions to see what life will be like in the future? What if our nation's suffering was ever more directly tied to the whim of the markets and not the ideals of democratic rule?