ACE USA
Focus on...
JUNE 2006
Extreme weather:
events, trends & consumer impact
by Kimberle Kennedy, ACE USA
The devastation wrought by Hurricanes Katrina, Wilma and Rita in 2005 presented
an all-too-striking reminder that we are living through a period of extreme weather with
extreme consequences. We mourn the loss of the many people who have died as a result
of natural catastrophes around the world — including the Indian Ocean tsunami, the
earthquake in Pakistan, and, most recently, from Hurricane Katrina — even as we recognize
that in the United States, improvements in forecasting, warning systems and building code
have dramatically reduced the loss of life.
Economic losses, however, are rising rapidly as more people move to areas that are
vulnerable to severe natural disasters, from the hurricane-prone counties on the East and
Gulf coasts, to mountain woodlands susceptible to fire and mudslides.
Often, the economic costs of devastation are measured in direct property losses. For
individuals, however, the financial consequences following a natural disaster are much
more difficult to quantify. In addition to uninsured property losses, victims of a natural
disaster must continue to meet their ordinary obligations, including debt payments on
mortgages and credit cards, while facing extraordinary expenses and potentially receiving
less income or none at all. At a time when the personal savings rate nationwide, at 0%,
is the lowest since the Depression and many families have the majority of their wealth
invested in their homes, a natural disaster can quickly put people in grave financial risk.
This white paper discusses the increase in extreme weather and some of the devastating
consequences, including the economic impacts on the financial health of the U.S. consumer.
It concludes with a brief look at common forms of financial protection that can reduce
some of that risk.
Weather Trends
In recent years, the United States has been hit by extremely powerful hurricanes at a
frightening frequency. Drought persists in some regions of the United States — damaging
crops and spurring wildfires — while other regions experience record rains, flooding and
snowfall. Many scientists attribute the increase in extreme weather to the fact that Earth’s
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climate is getting warmer. 2005 was the warmest year in more than a century, and the five
warmest years over the last 100 have occurred since 1998. The climate phenomena known as
El Niño can contribute to above-average warmth, as it did in 1998, but that was not the case
in 2005. Some part of the warming is due to natural climate fluctuations, but there are also
emerging views that human-induced climate change is contributing to greater absorption of
the sun’s energy and a rise in sea surface temperatures. Rising sea surface temperatures often
produce periods with more frequent major hurricanes. While the links between climate
change and extreme weather are not definitive, they are
growing more conclusive with ongoing research. Here
Storm forecasters
we examine some extreme weather events and trends.1
East and Gulf Coast Storms
call for another very
active season in 2006
with 17 named storms,
nine hurricanes, and
five intense hurricanes
of Category 3, 4 or 5.
Until Hurricane Katrina in 2005, Hurricane Andrew,
13 years earlier, was the most costly natural disaster with
$20 billion in insured losses and $45 billion in economic
losses. Andrew ravaged South Florida during a period in
which tropical storms were less frequent and less intense
than normal. Although there were other notable storms
— including Hurricane Hugo in 1989 — this relatively
quiet period lasted from the 1970s through 1994. Katrina,
in contrast, was the defining moment in a troubling trend toward more frequent and more
destructive storms that has been building over the last decade and threatens to continue or
worsen over the next 10 to 30 years.
Coming off a record storm season in 2004 — when hurricanes Charley, Frances, Ivan and
Jeanne hit Florida in succession — 2005
was the most active hurricane season
in history. Twenty-seven named storms
developed in the tropical Atlantic and
Caribbean oceans, and 14 of them became
hurricanes. Since 1995, an average 13
named storms have developed each year,
compared with an average of 8.6 during
the quiet period.
Even more remarkable than the
number of hurricanes was the number of
powerful storms. A record seven of the 14
hurricanes became “major hurricanes,”
those that measure Category 3, 4 or 5 on
the Saffir-Simpson scale. For the first time
ever, three storms reached Category 5
status, and a fourth — Hurricane Dennis
— was nearly as strong, reaching the top
Source: Aon Reinsurance Services, Annual Global Climate and Catastrophe Report: 2005
wind speed for a Category 4 storm.
Hurricane Katrina broke all records in a
record-breaking season, but the combined destruction of hurricanes Katrina, Rita and Wilma
within weeks of each other was, for many people, unfathomable. The three hurricanes caused
destruction amounting to $170 billion.
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Katrina first made landfall in south Florida
as a Category 1 hurricane, and it grew into
a large Category 5 storm as it turned toward
the north-central Gulf Coast. The storm struck
Louisiana and Mississippi with Category 3 winds
and massive storm surges — the water pushed
ashore by the hurricane — of 20 to 30 feet that
overtopped floodwalls and undermined the levees
protecting low-lying New Orleans from the waters
of Lake Pontchartrain and the Mississippi River.
The powerful storm surges were attributed to the
fact that Katrina approached land over the Gulf
of Mexico’s shallow northern shelf, as opposed
Hurricane Katrina raged as a Category 5 storm in the Gulf of Mexico on Aug. 28,
2005, a day before it slammed into the Gulf Coast.
to moving across deeper waters. The other factor
Credit: National Oceanic and Atmospheric Administration.
that made Katrina so devastating was its size. Its
30-mile radius was three times wider than Hurricane Camille, which caused massive
destruction in New Orleans when it made landfall just south of the city 36 years earlier.2
It is difficult to underestimate the scope of the damage. In New Orleans, homes were
consumed by waist-high waters, and in some areas rooftops barely peeked over water 30-feet
high. Houses shifted off their foundation and walls and roofs were blown out. In coastal
Mississippi, houses, businesses, hospitals and highways were crippled by winds, storm surges
or falling trees. All in all, Hurricane Katrina triggered claims of $45 billion, but total property
losses — including damage to buildings, infrastructure, vehicles and businesses — are estimated
at $135 billion, according to Swiss Re.
Less than a month later,
PROBABILITIES FOR AT LEAST ONE MAJOR* HURRICANE LANDFALL
Hurricane Rita, the second
Coastline
2006 Probability
Average Last Century
Category 5 storm, nailed southEntire U.S. coastline
81%
52%
east Texas and southwestern
U.S. East Coast
64%
31%
Louisiana, producing storm
(including Penninsula
surges, wind damage and
Florida)
flooding rains. Hurricane
Gulf Coast (Florida
47%
30%
Wilma followed in October,
panhandle west to
striking Mexico’s Yucatan
Brownsville, TX)
Peninsula before wreaking
*A major hurricane is Category 3, 4, or 5.
widespread damage in South
Source: Philip J. Klotzbach and William M. Gray, Department of
Florida and the Bahamas.
Atmospheric Science, Colorado State University. As of April 4, 2006.
Scientists predict that
the Atlantic Basin is likely to remain very active for at least the next decade, with some
estimates as long as 30 years. Storm forecasters at Colorado State University called for another
very active season in 2006 with 17 named storms, nine hurricanes, and five intense hurricanes
of Category 3, 4 or 5. On average, about 25% of all intense (Category 3-5) hurricanes make
landfall in the United States.3 The predicted probability of a U.S. major hurricane making
landfall is about 55% above the long-term average.
Pacific Flash Floods and Landslides
An onslaught of strong Pacific storms in the winter of 2005 and record snowpack levels
eased a five-year drought in parts of the Southwest. Los Angeles had its wettest 12-month
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“water year” (counting from October through September) in 121 years with 37 inches of
precipitation. Los Angeles experienced the wettest 15-day period on record — and more than
an entire normal rainy season — when nearly 17 inches fell in late December 2004 and early
January 2005. The Pacific storms brought five times the normal rainfall to the desert areas east
stretching toward Las Vegas, and ski resorts in the Sierra Nevada and near Lake Tahoe received
6 to 10 feet of snow.
The consequence of all that rain on previously dry land was severe flash flooding and
devastating landslides. A rain-soaked hillside collapsed onto homes in La Conchita in southern
California in January 2005. Ten people died and 15 to 20 homes were damaged or destroyed in
the mudslide. A year later, heavy rains and mudslides created emergency conditions in 20
Northern California counties. Three counties accounted for $300 million in property damage,
including homes torn from their foundations.4
At the same time that the Southwest was experiencing extreme precipitation in early
winter 2005, a drought worsened in the northern Rockies and the Pacific Northwest. By the
end of the winter of 2005, almost three-quarters of the Pacific Northwest suffered moderate to
extreme drought, but a year later, above normal rainfall in the winter of 2006 brought relief.
While one tempest following another brewed in the Atlantic basin, the number of tropical
storms in the eastern North Pacific was below average over the course of 2005. There were
15 named storms, compared with an average 16, and fewer strong storms. Seven reached
hurricane strength, and two were “major hurricanes” (Category 3 to 5).
In March 2006, the World Meteorological Organization (WMO) was reporting signs of a
La Niña event developing unusually early in the year. With La Niña, the sea-surface temperature
in the central and eastern tropical Pacific falls below normal, which is the opposite of the
warming El Niño. La Niña typically brings far dryer weather to the Southwest, as well as Florida
and western Latin America. Although La Niña typically lasts 12 months to as long as two years,
the WMO cautioned that this one, having developed so quickly, is unlikely to last very long.
Western and Southwestern Wildfires
Throughout the United States over the last 50 years or so, droughts have generally become
shorter, less frequent and less severe. The exception is in Southwest and interior West, where
even with increased precipitation, warmer temperatures have contributed to longer and more
severe droughts.5
With yet another dry winter in 2006, the persistent droughts over wide swaths of the
Southwest and southern Plains show no signs of substantially abating. Moderate to extreme
drought affected about one-quarter of the contiguous United States by the end of the winter,
the largest combined area since summer 2004.
Arizona experienced the driest winter on record, including a record-breaking 143 consecutive days without measurable rainfall in Phoenix. New Mexico experienced its second-driest
winter. An area from southern Texas through eastern Oklahoma, western Arkansas and southwest Missouri also experienced a drought characterized as “exceptional.” With just 1.59 inches
of precipitation over the three-month winter, Tulsa, Okla., suffered its driest winter since
records began in 1888.
One of the consequences of extended drought is an increased risk of wildfires. The threat
posed by wildfire has become more significant because a growing number of people live in
places exposed to the risk of brushfires. The number of houses in areas with high wildfire risk
just about doubled between 1970 and 2000.6 Between 1985 and 1994, wildfires in the United
States destroyed on average 900 structures, including houses, per year, but by 2003, the number
rose to nearly 4,000 structures.7
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2005 was a very active fire season, and the 8.53 million acres that burned across the United
States broke the record set in 2000. That year, the devastating Cerro Grande Fire in Los Alamos,
N.M., resulted in insured losses of $140 million. Large fires in 2005 destroyed homes and
businesses in Southern California, southern Nevada and Arizona.
HISTORICALLY SIGNIFICANT WILDFIRES 2000 TO 2005
Date
Name, Location
Acres
Significance
May 2000
Cerro Grande, NM
47,650
Originally a prescribed fire, 235 structures destroyed and Los Alamos
National Laboratory damaged
July 2001
Thirtymile, WA
9,300
14 fire shelters deployed; 4 lives lost
June 2002
Hayman, CO
136,000
600 structures destroyed
June 2002
Rodeo-Chediski, AZ
462,000
426 structures destroyed
July 2003
Cramer, ID
13,845
2 lives lost
Oct. 2003
Cedar, CA
275,000
2,400 structures destroyed; 15 lives lost
2004
Taylor Complex, AK
1,305,592
Alaska fires in 2004 burned over 6.38 million acres
June 2005
Cave Creek Complex, AZ
248,310
11 structures destroyed; largest fire ever recorded in the Sonoran Desert
Source: National Interagency Fire Center, www.nifc.gov/stats/historicalstats.html
With the persistent winter drought, 2006 started off with an unusually high level of
wildfires. In the first quarter of the year, about 10,000 fires burned across the contiguous
United States, with 75% of the burning acreage in the southern Plains, particularly Oklahoma
and northeast Texas. Both the number and size of the fires were exceptionally high for early
in the year, when wildfire risk is usually low.
Tornados
For those in Tornado Alley — a flat region in the southern and central plains between
the Rockies and the Appalachian Mountains — 2005 was a welcome relief, but 2006 was off
to a deadly start. After 1,376 tornadoes in 2003 — including a modern record one-week total
of 400 in May that caused $3.4 billion in damage and 51 deaths — 2004 brought a record 1,819
twisters in the United States. In 2005, Tornado Alley experienced something of a respite, with
only 975 tornadoes, the lowest number in 15 years. It’s important to recognize, however, that a
low average number of tornadoes nationally is irrelevant to those places where they strike. In
2005, for example, the 135 tornadoes in Kansas marked the highest yearly total since 1950 and
far exceeded the normal of 55.8
The start of the 2006 tornado
season in March was unusually
severe with 226 twisters, the
greatest number reported for
that month in more than half
a century.9 The deadly tornadoes
struck five states, but Missouri
was particularly hard hit, with
damage to more than 1,000
homes. The tornadoes grew
as wide as one-half mile with
hail the size of baseballs. The
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strongest storm recorded 160 mph and 200 mph. Damages for tornadoes that occurred over
a 5-day period were greater than $100 million.10
The area of the United States most prone to significant tornadoes is an L-shaped region
from Iowa to Oklahoma to Mississippi, and the highest threat is in Oklahoma. But tornadoes
can strike anywhere.
Why Is There More Extreme Weather?
The perception that we are experiencing more extreme weather is real, and there is a
growing scientific consensus that while natural climatic cycles contribute to extreme weather
— such as greater hurricane activity in the Atlantic basin — human-induced global warming
also plays a significant role.
The Warming Earth
The Earth is heating up, and the consequences of increasing global temperatures are
becoming apparent more quickly than many models have predicted. Recent studies suggest
that global sea levels are rising as water melts from ice sheets and glaciers at a pace much
faster than previously thought possible.11 While scientists are still trying to understand the
dynamics underlying the rapid melting, it is
indisputably a consequence of the warming Earth.
The global average surface temperature — which is
the average of air temperature over land and sea surface
temperature — has risen by about 1.1°F since the
beginning of the 20th century. An increase of 1 degree
over 100 years may not sound like much, but it was
probably the biggest increase of any century during
the past 1,000 years. While most of the warming in the
20th century took place during two periods (1910 to
1945 and 1976 to 2000), the steepest rise has occurred
since 1976. According to the Intergovernmental Panel
on Climate Change, temperatures after 1976 increased
about three times faster than the century as a whole.
The rising global temperature surely reflects some
naturally occurring variability in climate, but there
is widespread agreement in the scientific community
that the changes observed in the second half of the
20th century are most likely due to human activities,
The highest global surface temperature in
particularly the burning of fossil fuels. The increasing
more than a century of instrumental data was
concentration of carbon dioxide and other “greenhouse recorded in the 2005 calendar year in the
annual analysis by NASA’s Goddard Institute
gases” contributes to global warming by trapping heat
for Space Studies. While 2005 is really in a
in Earth’s atmosphere. Current estimates project that
statistical dead heat with 1998, that year’s
average temperature was lifted 0.2°C above
a steady rise in atmospheric greenhouse gases will lead
the trend line by the strongest El Niño of
to an increase between 2.4°F and 10.5°F over the next
the past century. Source:
http://data.giss.nasa.gov/gistemp/2005
100 years.12
A number of long-term changes have occurred as
the planet has grown warmer over the last century. Precipitation in the Northern Hemisphere
increased 10% and global sea level rose 4 to 8 inches. Recent studies have scientists concerned
that land-based glaciers appear to be sliding into the sea much faster than anyone predicted.
One explanation of the accelerating melt describes a frightening feedback loop: Polar ice
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reflects the sun’s radiation back into the atmosphere, while ocean water absorbs it. As
In the U.S., coastal
more ice melts, the absorbed energy makes the water warmer, melting the remaining
ice faster and faster.13 Why the worry? Among other things, rising ocean levels pose a
regions represent just
grave threat to low-lying coastal communities and ocean islands. In the United States,
17% of total land area
coastal regions represent just 17% of the total land area (excluding Alaska), but they
(excluding Alaska),
house 53% of the population.
We may already be experiencing some of the extreme weather events that result
but they house 53%
from changes created by a warmer climate.
of the population.
The warming of the Earth’s surface supplies more water vapor to the atmosphere,
leading to the likelihood of more precipitation
overall and more intense rainfall from
individual storms. Still, some dry lands are
getting even drier as high temperatures cause
rapid evaporation of moisture. Scientists at
the National Center for Atmospheric Research
estimate that the percentage of land area
stricken by serious drought more than
doubled from the 1970s to the early part of
this century. They attributed almost half the
change to rising temperatures rather than
decreases in rainfall or snowfall. While parts
of the United States, particularly the
Southwest, have experienced severe drought,
causing economic losses from crop failures,
the consequences of drought can be fatal
Population density of the United States, coastal states, coastal counties and
in poor countries, where shortfalls threaten
noncoastal counties from 1980 to 2008.
millions of people with starvation.
Source: Population Trends Along the Coastal United States: 1980-2008, NOAA.
Natural Cycles
While much attention focuses on the ways human activity has increased global warming
and its consequences, it is important to recognize that much of the extreme weather we
experience, such as increased hurricane activity, falls into natural cycles. These cycles include
the El Niño Southern Oscillation and its counterpart La Niña; the North Atlantic Oscillation;
and the Atlantic Multidecadal Oscillation.
• El Niño/La Niña. The El Niño Southern Oscillation occurs every few years. In the El Niño
phase, unusually high sea-surface temperatures in the eastern and central equatorial
Pacific seem to reduce the frequency of Atlantic hurricanes and bring above-average
winter precipitation to the southern half of the United States as well as above-average
temperatures in the Midwest. During the La Niña phase, unusually low sea-surface
temperatures contribute to above-average winter temperatures in the South, more tropical
Atlantic hurricanes, more tornadoes in the Ohio and Tennessee valleys, and drought in the
eastern half of the country.
• North Atlantic Oscillation. This cycle plays a role in the path hurricanes follow. In
the positive phase of the North Atlantic Oscillation, a strong Azores High tends to steer
hurricanes out to sea before they make landfall in the United States. In the negative phase,
the high pressure area known as a Bermuda High is more likely to push hurricanes toward
land in Florida and the Gulf of Mexico.
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• Atlantic Multidecadal Oscillation. The frequency of powerful storms can also be explained
by this climate cycle, whose phases, as indicated by its name, extend over several decades.
The AMO is an ongoing series of changes in the sea surface temperature of the North
Atlantic Ocean. The AMO alternating cool and warm phases can last 20 to 40 years each.
More intense storms occur more frequently during warm phases than during cool phases.
The current AMO warm phase began in 1995, ending a cool phase that began in 1970. The
number of hurricanes during the current warm phase is 60% greater than occurred in the
preceding cool phase, and a greater proportion of those hurricanes have been intense. The
number of major hurricanes — those classified as Category 3, 4 or 5 — has increased 150%
relative to that period. Since 2003, more than half the major hurricanes made landfall at
those intensities.14
More Destructive Storms
The destructive force of tropical windstorms has more than doubled in the past 30 years,
and recent studies indicate that global warming may result in a continuing upward trend.
The destructive power is due to longer-lasting storms and greater intensities. As Kerry Emanuel,
an expert on the destructive force of tropical storms from the Massachusetts Institute of
Technology, notes: “Whatever the cause, the near doubling of power dissipation over the period
of record should be a matter of some concern, as it is a measure of the destructive potential of
tropical cyclones.”15
Emanuel’s studies have shown that the sea surface temperatures and destructive force
of storms exceed those compared with the last AMO warm phase, in the 1950s. There is also
growing concern that if, indeed, climate change is contributing to the increasing sea surface
temperatures, they may not go back to the averages seen in the previous cool phase.
With strong evidence that more frequent powerful storms are expected for at least a decade,
Risk Management Solutions (RMS), a company that quantifies catastrophe risk for the insurance industry, recently changed its models
RMS projects that changes in
to reflect greater potential insurance losses. RMS projects that
hurricane activity will increase
changes in hurricane activity will increase average annual property
average annual insurance losses
and business interruption losses by about 40% across the Gulf Coast,
Florida and the Southeast and by 25% to 30% in the mid-Atlantic
by about 40% across the Gulf Coast,
and Northeast coastal areas.
Florida and the Southeast and by
25% to 30% in the mid-Atlantic and
Northeast coastal areas.
Economic Impact
The costs of natural disasters are often expressed in terms of
insured losses — amount of money that insurance companies will
pay to policyholders making claims. And while homeowners insurance goes a long way toward
helping people recover from significant property losses, the amount paid in claims does not
adequately represent the financial costs to a community or to individuals.
Looking to Hurricane Katrina for example, private insurers were expected to pay $45 billion
in claims, while the National Flood Insurance Program is paying close to $20 billion.16 But total
economic losses, including insured and uninsured property and flood damages, are expected to
exceed $200 billion.17
These numbers help quantify the scope of the damage, but even they tell little about the
impact of a natural disaster on the economic well being of individuals and the communities
struck by disaster. In fact, there really are no comprehensive data to provide definitive answers,
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and the impact varies greatly depending on the scope of the disaster and the wealth of t
he victim. Still, anecdotal evidence supports what our intuition tells us: for many families,
financial catastrophe can easily follow in the aftermath of a natural disaster.
Victims of a natural disaster lose much if not all of the value of their home, their single
largest asset. They face a large drop in income — or none at all — as employers whose businesses
were damaged by the disaster shut down temporarily, if not
permanently. At the same time, these families are still obligated
to pay their debts, including a mortgage on a house that may be
From the end of June to the end
temporarily uninhabitable. They must repair their homes when
of September 2005 — the quarter
costs are highest because the surge in demand and limited supplies
during which Katrina struck —
drive up prices.
mortgage delinquencies increased
Here’s how Robert Lawless, a professor of law at the University
of Nevada, Las Vegas, described the circumstances driving families
from 6.67% to 24.63% in Louisiana
into bankruptcy following Hurricane Katrina:
and from 8.53% to 17.44% in
Many persons who survived Hurricane Katrina’s devastation in August
Mississippi.
2005 were left without homes, without jobs, and without most of the assets
they had accumulated over a lifetime. Although their financial resources
were gone, past debts remained, and new obligations arrived. Hurricane Katrina’s victims had to pay
for housing, food, transportation, health care, and all of the other expenses necessary to sustain themselves.
While trying to build a new life, Hurricane Katrina’s victims still had to contend with the obligations of
a previous one.18
Lawless’ study of 18 major hurricanes found that in the 12 to 36 months following a
hurricane, states where major hurricanes made landfall have an average increase in bankruptcy
filing rates that is about 50% larger than the increase in states unaffected by a hurricane. In
other states affected less directly by the hurricane, the average increase in filings was about
20% higher than in unaffected states.
For every person who files for bankruptcy, there are many more who are just hanging on as
the financial dominos fall. After Katrina, more people were late with their mortgage payments.
From the end of June to the end of September 2005 — the quarter during which Katrina struck
— mortgage delinquencies increased from 6.67% to 24.63% in Louisiana and from 8.53% to
17.44% in Mississippi, according to the Mortgage Bankers Association (MBA). “The hurricane’s
impact will likely result in higher delinquency rates and somewhat higher foreclosure rates
for at least the next few quarters,” the MBA predicted.
Part of the financial challenge is that the income of disaster victims may plummet just as
they face extraordinary expenses. Major disasters will shut down businesses, reducing wages
for many workers. In the wake of Hurricane Andrew, for example, 7,800 businesses closed and
86,000 people were out of work.19
While Andrew was clearly an extraordinary event, the Insurance Information Institute
calculates that even relatively minor events can cause significant economic disruption. About
6,000 jobs would be lost and sales tax and payroll losses would approach $1 billion if even 1%
of the businesses in Florida’s six hurricane-prone counties closed. If an event like Andrew were
to re-occur in Florida, closing 10% of businesses, 106,500 people would be out of work.
In a disaster as devastating as Katrina or Hurricane Andrew 13 years earlier, there is great
uncertainty about whether people will ever recover their investments in their homes. Given
average repair costs, about 35,000 single-family homes on the East Bank of New Orleans may
not be economically worth repairing, the MBA said, “particularly given the potential of postKatrina market value declines.”
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Mitigating Risk of Financial Disaster
For much of America living paycheck to paycheck, the disruption of income, even if only for one
month, can seriously jeopardize the financial stability of that family. Homeowners insurance
is an important form of financial protection in the event of a natural disaster, but it often does
not cover all repair costs and supplementary coverage can help reduce some of the burden. The
following is a brief description of some homeowners policies.
Standard Homeowners Policy
A standard policy provides coverage for the structure of the home; coverage for personal
belongings; liability protection; and some additional living expenses if the home is temporarily
uninhabitable. The most popular homeowners policy typically excludes or does not adequately
cover damages caused by mudslides, wind, hail, or floods. Policies may pay actual cash value,
replacement cost, guaranteed replacement cost (pays whatever it costs to rebuild, even if it
exceeds the policy limit) or extended replacement cost (pays a certain percentage over the limit
to rebuild.)
Homeowners policies do not cover all repair costs. Homeowners have to pay out of pocket
for losses that exceed the limits of the policy and for policy deductibles.
• Insufficient coverage. Many people buy just as much homeowners insurance as their
mortgage lender requires — typically the amount of the outstanding loan — instead of the
amount necessary to rebuild their house. Coverage may fall short if homeowners fail to
increase their coverage limits to account for improvements to their house, increases in
building costs and stricter building codes. If a home is not insured for its full replacement
value as well as the value of its contents, the policy’s coverage limits may fall short of
what’s necessary to fix the house and replace the contents. This is especially problematic
when the surge in demand for labor and materials following a storm drives up prices.
Almost 60% of American homes are underinsured by an average of 22%, according to
building cost experts Marshall & Swift/Boeckh.
• Deductibles. Deductibles are a common feature in homeowners policies. To protect
themselves from overwhelming catastrophic losses, insurers in coastal areas require homeowners to bear a greater share of the cost for property damage caused by hurricanes and
other severe windstorms. Many insurers have shifted from flat deductibles to percentage
deductibles for wind damage. Instead of paying the first $500 out of pocket, as in a typical
homeowners policy, the percentage deductible is based on the insured value of the home.
If a house was insured for $150,000 and had a 2% windstorm deductible, the policyholder
would have to pay the first $3,000 of a wind damage claim. Deductibles can vary from 1%
percent insured value to 15%. With a percentage deductible, policyholders with expensive
houses pay a larger deductible than people with less expensive homes.20
Flood Insurance
Floods continue to be the most destructive natural hazard in terms of damage and economic
loss, yet flooding is rarely covered by private insurance and few people buy federal flood insurance
unless it is required to obtain a mortgage.
Insurance provided by the National Flood Insurance Program covers direct physical losses by
flood and losses resulting from erosion caused by floodwaters from a severe storm, flash flood
or abnormal tide surge. It also covers mudflows. Homes are limited to $250,000 in building
coverage and $100,000 in contents coverage. A few private insurers offer excess flood insurance
that provides coverage above the federal flood program limits.
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A recent study by the RAND Corp. found that only half of homeowners living in the most
flood-prone areas of the United States buy federal flood insurance. Homeowners outside
high-risk flood zones also can face uninsured losses. The Federal Emergency Management
Agency (FEMA) says that nationwide, 25% to 30% percent of all flood claims occur in the
low-to-moderate risk areas, yet the RAND study found that just a scant 1% of Americans living
outside flood zones buy federal flood insurance. Too often, people buy flood insurance when
required by a lender, but without that, they fail to carefully consider the real need given the
location of their home, their financial resources and the probable risk of damage.
Disaster Mortgage Protection
This affordable, supplementary coverage fills the holes in the insurance safety net. It
reimburses some or all of the homeowners insurance deductible and can pay the policyholders’
mortgage payment for up to two years if the house is deemed temporarily uninhabitable for
more than 48 hours. It also will pay a mortgage balance up to $250,000 if the home is deemed
permanently uninhabitable due to condemnation or movement of the land on which the
home is located.
Disaster Mortgage Protection and other insurance policies like it provide added financial
security at a time when the economic effects of disaster and resulting property damage can
cause financial ruin.
Conclusion
The Earth is heating up — a result of both natural cycles and human-induced global warming
— and one consequence will be an increase in extreme weather events. Instead of fleeing from
disaster-prone areas, people in the United States are flocking to them.
It’s not that coastal populations are growing faster than the population of the country
— both populations grew 28% from 1980 to 2003. The problem is that greater numbers of
people are squeezing into a very limited space. Twenty-three of the 25 most densely populated
counties are coastal. And it’s not just the coasts that are attracting people. Maricopa County
in Arizona and Clark County in Nevada are expected to be two of the four leading counties in
population growth from 2003 to 2008. These areas, too, are exposed to threats from extreme
weather, in this case wildfire.
It would be logical to think that people would avoid living in the most vulnerable places,
but they don’t. In fact, the very attributes that make a place hazardous also make it appealing:
the lovely ocean breezes fanning beachfront houses can turn into a powerful windstorm;
homes on a mountain ridge have wonderful views but also face greater risk from wildfire.
The economic costs of extreme weather events will continue to rise as more people move to
these vulnerable areas.
Hurricane Katrina, like Andrew before it, cast a spotlight on the harsh financial reality for
victims of a natural disaster. They lose much if not all of the value of their home, their single
largest asset. Their income plummets as businesses damaged by the disaster shut their doors
and lay off workers. At the same time, these families are still obligated to pay their mortgage
and other debts. And if they did not have adequate insurance, they must repair their homes
at a time when costs are highest because the surge in demand and limited supplies drive up
prices. For many families, natural disaster quickly grows into a financial disaster.
Disaster awareness and preparedness are the first steps in reducing the risk of personal
danger. Adequate savings and insurance can offer a strong measure of protection against the
financial burden of disasters that affect homes and families.
(continued on page 12)
11
FOCUS ON... | JUNE 2006
ABOUT THE AUTHOR
Kimberle Kennedy is Vice President, ACE Accident & Health. The Disaster Mortgage Protection
product unit of ACE Accident & Health is a division of ACE USA that is committed to help
insured groups and their members withstand the serious impact of catastrophic loss, sickness
or sudden injury.
NOTES
1.
Weather data in the following sections is drawn primarily from reports prepared by the National Climatic Data Center and AON Reinsurance
Services Annual Global Climate and Catastrophe Report: 2005.
2.
“Now What? The Lessons of Katrina.” Popular Mechanics, March 2006. Accessed online at
http://www.popularmechanics.com/science/earth/2315076.html?page=9&c=y
3.
Risk Management Solutions, U.S. and Caribbean Hurricane Activity Rates, March 2006.
4.
“Mudslides Threaten Soaked Northern California,” Realty Times, Jan. 6, 2006.
5.
Andreadis, Konstantinos M. and Dennis P. Lettenmaier. “Trends in 20th Century Drought over the Continental United States.” Draft paper
dated Jan. 17, 2006, accessed online: http://www.hydro.washington.edu/Lettenmaier/Publications/andreadis_drought_trends.pdf
6.
Kovacs, Paul. “Wildfires and Insurance.” Institute for Catastrophic Loss Reduction Research Paper Series — No. 11. January 2001.
7.
Wildfire Risk and the Housing Market, http://www.myfirecommunity.net/documents/house%20price.pdf Based on data from the National
Fire Protection Association and a paper presented by Dave Cleaves of the USDA Forest Service at the National Disasters Roundtable in
2001. The paper is available at http://dels.nas.edu/dr/docs/cleaves.pdf
8.
Topeka Capital-Journal Online. http://www.cjonline.com/special/06severeweather/
9.
U.S. Tornado Frequency, by Month, 1950 — 2004 http://www.hprcc.unl.edu/nebraska/tornado-totals-monthly-US.html
10.
Business Insurance, March 20, 2006, and http://en.wikipedia.org/wiki/March_2006_Tornado_Outbreak_Sequence
11.
Roach, John. “Global Warming Is Rapidly Raising Sea Levels, Studies Warn.” National Geographic News, March 23, 2006
12.
Purdue Climate Change Research Center, http://www.purdue.edu/climate/climate_change_info/index.htm
13.
Kluger, Jeffrey. “Polar Ice Caps Are Melting Faster than Ever, More and More Land Is Being Devastated by Drought…Rising Waters Are
Drowning Low-Lying Communities. By Any Measure, Earth Is at the Tipping Point,” Time magazine, March 26, 2006.
14.
Risk Management Solutions, March 2006.
15.
Emanuel, Kerry. Increasing Destructiveness of Tropical Cyclones Over the Past 30 Years. Nature, Vol. 436/4 Aug. 2005.
16.
Swiss Re, 2006.
17.
Hurricane Katrina: Insurance Losses and National Capacities for Financing Disaster Risk, Congressional Research Service, Report for
Congress. Sept. 15, 2005.
18.
Lawless, Robert M. “Bankruptcy Filing Rates After a Major Hurricane.” Nevada Law Journal, Vol. 6.1, 2005.
19.
“Florida Case Study: Economic Impacts of Business Closures in Hurricane Prone Counties,” Paper by Robert P. Hartwig, Ph.D., Senior
Vice President & Chief Economist, Insurance Information Institute, June 2002. This paper attributes the information to the Governor’s
Commission on Hurricane Andrew, Executive Order 92-921,” Governor’s Disaster Planning and Response Review Committee, 1992.
20.
Insurance Information Institute, Hot Topics, Hurricane and Windstorm Deductibles, February 2006.
ACE USA is the U.S.-based retail operating division of The ACE Group of Companies, headed by ACE Limited (NYSE: ACE), and is rated A
(Excellent) by A.M. Best Company and A+ (Strong) by Standard & Poor’s. ACE USA, through its underwriting companies, provides insurance
products and services throughout the U.S. Additional information on ACE USA and its products and services can be found at www.ace-ina.com
or www.dmp-ace-com. The ACE Group of Companies provides insurance and reinsurance for a diverse group of clients around the world.
This publication is solely for informational purposes. It is not intended to be legal advice. The opinions herein are not the opinions of ACE USA
or any of its underwriting companies.
Copyright © 2006
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