Understanding Risk in a Decade of Natural Catastrophes

In the past 10 years, the U.S. has seen 121 events produce damage in excess of $1 billion. Globally, this escalates with many more events around the world. From major hurricanes and floods, to annual severe weather, devastating wildfires, and even the rarer occurring earthquakes and volcanoes, in the past decade, the U.S. has seen them all.

In the latter half of the decade, the trend of catastrophic losses continued to rise with events like Hurricane Harvey (2017) and the California wildfires (2017 and 2018) among the most costly and disruptive.

Now more than ever, insurers need real-time data to understand risk on a granular level and best serve their policyholders.

Flood

Flooding is the No. 1 natural disaster in the U.S. and is not specific to designated flood risk zones or a season. Flood can affect any location. On average, about 300,000 homes are flooded in the U.S. every year. Some of the most devastating floods in recent years have been associated with hurricanes.

In 2017, Hurricane Harvey, a Category 4 storm at landfall, stalled over the Greater Houston metropolitan area and caused massive precipitation-induced flooding. CoreLogic estimated that Harvey caused between $25 billion and $37 billion in damage to residential and commercial properties, with 70% of this uninsured. Hurricane Harvey arrived during a time of increasing interest by private industry to insure flood. The disruption and lessons from the Harvey flooding accelerated the privatization efforts of insurance carriers and highlighted the need for flood insurance outside of designated flood zones.

One year later, in 2018 Hurricane Florence, a massive Category 1 hurricane traveled slowly over North Carolina, South Carolina and Virginia, causing massive flooding. CoreLogic estimated flood damage to residential and commercial properties ranged from $19 billion to $28.5 billion, of which roughly 85% of residential flood losses were uninsured. The high percentages of low adoption of insurance demonstrate the low number of properties in the U.S. that are covered by flood insurance, which is likely because of limited understanding of flood risk, especially the risk outside of designated flood zones.

Wildfires

Additionally, in California and across much of the western U.S., wildfires have become increasingly severe. Between 2012 and 2016, California wildfires destroyed a yearly average of 1,172 structures. This escalated in 2017, with more than 10,000 structures destroyed by wildfire and even more in 2018, with more than 22,000 structures destroyed. 2017 and 2018 were two of the most devastating wildfire years in U.S. history.

Since 2018, 11 Western states have had at least one wildfire that exceeded 50,000 burned acres. The leading states were California and Oregon, each with seven fires that burned more than 50,000 acres. Wildland-Urban Interface (WUI) zones have historically been used to define areas of risk, but like with flood, this does not mean there is no risk outside of the WUI. In California alone, nearly 4.5 million homes, representing almost one-third of California housing units, are in the WUI zone. The 2017 fires in Sonoma County, California remind us that homes in areas adjacent to the WUI are at risk.

Unlike other hazards, wildfire is a unique peril in that it can cause 100% destruction, resulting in the total loss of a home and all its contents. The devastating 2018 Camp Fire destroyed over 18,000 structures and took more than 80 lives. Many of the homes, like in the case of those in Paradise, will never be rebuilt, giving extended clarity for the need to be protected. Adequately assessing the reconstruction value of a home is paramount to gain an accurate understanding of the components and price to rebuild.

Convective Storms

Severe convective storms, including tornadoes, thunderstorms, hailstorms and high-speed winds, are among the most common and most damage-inducing natural catastrophes in the U.S. On average, the U.S. sees 1,400 tornadoes every year, but there is great variation in the annual counts and not all of these will hit an urban center and cause damage. Hailstorms are very damaging to property. In the spring of 2016, over a two-month period, CoreLogic documented four storms in Texas alone that impacted more than 900,000 homes with hail (an aggregate total for all four storms). The estimated damage to homes for those storms exceeded $700 million.

Earthquakes

While the past decade has seen devastating earthquakes globally, including the 2010 Haiti earthquake, 2010-2011 New Zealand earthquake sequence, 2011 Tohoku, Japan, earthquake among the most devastating, it has been more than two decades since the U.S. has experienced a major catastrophic earthquake.

Even though a major damaging earthquake has not been recorded, the U.S. has seen earthquake damage in the past decade. In 2011, a magnitude 5.8 earthquake struck Virginia, which was felt by an estimated one-third of the U.S. population. In 2014, a magnitude 6.0 earthquake struck the Napa region of California, damaging homes and disrupting the wine industry. The total damage from this event was estimated to approach $1 billion.

The largest earthquake to strike the continental U.S. in the last decade struck California’s lowly populated Mojave Desert, near Ridgecrest with a magnitude 7.1 earthquake plus a magnitude 6.4 foreshock and several large aftershocks. Despite the magnitudes of these earthquakes, the damage to property was low due to the remoteness of the region and a modern building code. These events serve as a reminder that the earthquake risk in the U.S. is real and an understanding of the risk is necessary to adequately prepare.

Whether it be hurricane, flood, severe weather, wildfire or earthquake, every part of the U.S. is exposed to some natural hazard. While we currently sit in an environment where much of the country is starting to reopen, various levels of social distancing requirements remain in place due to the COVID-19 pandemic.

Response efforts for any disaster will be challenged this year and insurers need to have the financial resources to help their policyholders rebuild. The ability to recover after an event is critical to building a resilient society, which can be improved by strengthening or retrofitting homes and businesses.

It’s unclear what the next decade of natural disasters will bring — but it’s up to the insurance industry to reflect on the past to best prepare for the future.