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The Most Powerful Hurricanes Aren’t Always That Costly

MarketPlaceBy: Janet Nguyen and Tony Wagner

Hurricane Patricia, the most powerful hurricane on record, hit Mexico’s pacific coast this afternoon. The storm gained much of its strength in just the past day, and Mexicans have been bracing for impact. But even when a storm is catastrophic, its economic impact often isn’t.

“It’s definitely is going to be huge in terms of the areas it hits like Manzanillo, maybe Puerto Vallarta, maybe Guadalajara, so I don’t want to diminish that, but the population centers are smaller, much smaller,” said Evan Gold, senior vice president for client services at Planalytics, an analysis firm focused on how weather events affect business. “So this is economically going to be smaller.”

The severity of a storm matters, Gold said, but the actual cost often correlates more strongly with where a storm hits. Put simply: more people means higher costs.

David Letson, a professor of marine ecosystems and society at the University of Miami, said hurricane-related costs have gone up in recent decades because an increasing number of people are living on the Gulf Coast and in the South Atlantic.

“And when a lot of people do, and build big houses there, you get a lot more exposure to risk,” he said.

For example, in Florida, there’s a lot of construction in the Miami area aimed at accommodating larger amounts of people, said Lynne McChristian, a representative at the Insurance Information Institute.

“In Miami, they may knock down a modest structure and build a high rise. That just puts more population density into a concentrated area,” she said.

Different regions carry with them different types of vulnerabilities, Letson said. The U.S. Gulf and South Atlantic coasts have high risk exposure in terms of property damage, but other regions — particularly developing countries — tend to have higher mortality risks, because their flood defense and public health systems are less advanced, he said.

Patricia is stronger but comparatively compact, potentially limiting the number of people affected by the worst of the worst before the storm dissolves after landfall.

In Mexico, it can be difficult to gauge financial losses from natural disasters because of the insurance regulations in the country — or lack thereof, McChristian said.

There’s no central bureau to report insurance losses, and some of the insurance you’re required to have in Mexico is related to liability insurance, not property damage, she added.

In the U.S., there are state regulators who collect insurance data, while Mexico doesn’t have such a mechanism in place, McChristian said.

Hurricane Katrina had the biggest economic impact because it represented the worst of both measures, Gold said: It was a large, intense storm in a huge population center. Sandy was downgraded from a hurricane to a superstorm right before making landfall in New York and New Jersey, but the economic impact was enormous.

“That’s now the second-most impactful storm in U.S. history, and it wasn’t even a hurricane,” Gold said. “And that’s solely based on the damage that it still brought about, because it hit in the largest population center in the country.”

The economic impact of tropical storms has increased over time — of the 10 most expensive storms to hit the U.S. since 1980, seven made landfall in the past decade. Weather has become more volatile in the current climate, Gold said, but we also have more information and more interest in extreme weather than ever before.

“It’s very clear that post-Katrina, at least within the U.S., we are a lot more weather-aware,” he said.

Just because the storm won’t bring economic catastrophe doesn’t mean it won’t have an impact, Gold said. In general, hurricanes bring a big boost to home improvement stores and convenience stores as people stock up on necessities. Conversely, apparel companies and other mall-based stores are hurt, he said. It’s possible we’ll see some of these impacts over the border, as the storm brings flooding to southern states. Patricia will bring tourism concerns as well, if it hits Puerto Vallarta.

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