America has the resources to face Sandy

October 29, 2012

With Hurricane Sandy descending on the mid-Atlantic coastline, I looked back at what I wrote when Hurricane Irene was making landfall last August:

Hurricane Irene, an enormous storm of unimaginable power, is bearing down on the East Coast. Although there could be loss of life and substantial property devastation, America has more than enough resources to meet her and survive mostly intact. Unlike third-world countries we have the people, equipment and money in reserve to clean up…

Cities, counties, states and utility companies are on standby. Funds have been reserved to respond to emergencies and the federal government has a large department, the Federal Emergency Management Agency, ready to provide local assistance. The public sector is ready to go.

Irene was not a particularly strong hurricane. But it may not be the same story for Sandy. One of the syndicate members of Lloyds of London, ICAT, has an excellent hurricane database, which they make available to the public. ICAT says that 1972’s Hurricane Agnes had the most similar conditions to Sandy, and it caused about $19 billion in damages (adjusted for 2012 inflation):

Hurricane Agnes of 1972 made landfall with 85 mph sustained winds near New York City and would cause an estimated $19B in damage today. Agnes initially made landfall over the Florida Panhandle, then moved NE and emerged off the North Carolina coast. As it approached New England, the storm strengthened as it underwent extratropical transition, which is also expected to occur with Hurricane Sandy. Hurricane Agnes’s impacts were felt across a very wide area of the Northeast.

ICAT’s cost estimate for damage is being mirrored by other actuarial type firms:

Hurricane Sandy may cause as much as $20 billion in economic damage and losses as the biggest Atlantic storm floods homes, disrupts millions of fliers, and forces retailers to close stores.

Insured losses may reach $5 billion to $10 billion, or about half of the total, according to an estimate today by Eqecat Inc., an Oakland, California-based provider of catastrophic risk models.

Who pays the cost for all this damage? The losses are generally born across the economy. The federal government pays for about 75% of the cost of the pubic clean-up through pass-throughs to state and local governments. The Wall Street Journal reports on its website:

Federal emergency officials said Monday they have plenty of money — about $3.6 billion — to pay for the disaster relief and response to Hurricane Sandy.

If we add 25% more, or approximately $900 million, as the local government contribution, we would have about $14 billion in remaining losses. According to the Federal Reserve’s Flow of Funds, U.S. property casualty insurers’ net assets exceeded their liabilities by $526 billion in the second quarter of 2012 (page 81). So the costs of Sandy should be easily borne in the private sector. Local governments are stretched thin, but losses of $5 billion can be born.

Hurricanes are a natural and recurring event. Households, governments and private insurers must have reserves to meet unexpected economic challenges. Sandy is proof that it is critical to save for a rainy day.

Here is a table from ICAT listing strongest storms to make landfall between New Jersey and Connecticut:


Photo: University of Wisconsin-Madison

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