Insurance

The biggest disasters in U.S. history: And how they changed the insurance industry

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We tend to think about insurance from our perspective. We may not always like paying our monthly premium, but we appreciate the peace of mind that comes from knowing we are protected when something terrible (and expensive) happens to ourselves, our cars or our homes. 

But let’s consider for a moment the perspective of the insurance company. To exist as a business, they need to make a profit, and to make a profit they need to take in more money in premiums than they pay out in claims. 

Before deciding how much you will pay for your insurance, they carefully weigh the potential risk factors. If it’s home insurance they’ll look at where you live and the likelihood that certain perils (hurricanes, hail, snow) will cause damage to your home. If it’s car insurance they’ll consider factors like your age, driving history and, again, where you live, to predict how likely you will be to file a claim. 

If they price it well, insurance companies should be able to make money, while still paying out for expected claims. However, sometimes things go very wrong. Below are some of the biggest disasters in U.S. history (in terms of insurable losses) in the last 30 years and how they impacted the insurance industry. (Spoiler: many of them are hurricanes.) These are listed chronologically.

1. Northridge Earthquake

In January of 1994, the San Fernando Valley and the city of Los Angeles were rocked for 10-20 seconds by the highest ground acceleration ever recorded in an urban area in North America. Several aftershocks also had devastating consequences. More than 9,000 people were injured and damage to property was estimated to be around $49 billion[1]. The sheer magnitude of destruction was beyond what insurance companies could have predicted. The earthquake resulted in a number of legislative changes including the creation of the California Earthquake Authority which is a publicly managed organization that sells earthquake insurance to California residents through participating insurance companies[2].

 northridge

2. September 11 terrorist attacks

While hurricanes at least follow a predictable path and occur in an expected season, a terrorist attack plays by no rules. The terrorist attack on the World Trade Center on September 11, 2001 remains the worst terrorist attack in U.S. history. In addition to the unfathomable loss of life, there were significant damages to infrastructure in downtown Manhattan. The result was $35.9 billion in insurable losses. Prior to this attack, terrorism was not considered a separate line of insurance because the risk was perceived to be extremely low[3]. In the aftermath of September 11, homeland security enacted the Terrorist Risk Insurance Act (2002) which created a U.S. government backed reinsurance facility to help protect insurance companies in the event of a declared act of terrorism.

 sept11

3. Hurricane Katrina

In August of 2005, Hurricane Katrina hit the city of New Orleans causing catastrophic flooding to 80% of the low-lying city. All told, Katrina caused 1,800 fatalities and $125 billion in damages. In addition to the destruction of property in the city of New Orleans itself, Katrina also damaged oil platforms in the Gulf of Mexico and caused significant damage in both Louisiana and Mississippi. The insurance industry is estimated to have paid out around $41 billion in claims through homeowners and business policies. Katrina led to insurance companies rethinking the way they model catastrophic events[4]. While reinsurance companies generally take on the risk of large-scale disasters, now they require the insurance companies themselves to model the possibility of huge natural disasters before they will cover them. Additionally, home and car insurance prices in Louisiana remain some of the highest in the country.

 katrina

4. Hurricane Sandy

Hurricane Sandy or Superstorm Sandy as it is sometimes known wreaked havoc across eight countries from the Caribbean to Canada in October of 2012. The result was $65 billion in damages in 24 U.S. states, including severe damage in New York City and New Jersey. The event caused insurance companies to take a harder look at the East Coast. While previously, few hurricanes had caused as much damage in this area, Hurricane Sandy provided a new, highly destructive data point to include in underwriting models.

 hurricane sandy

5. Hurricane Harvey

In August of 2017, Hurricane Harvey made landfall in Texas and Louisiana causing the deaths of 100 people and inflicting $125 billion in damages (thus tying with Hurricane Katrina as the most costly hurricane on record). Much of the damage was done by rainfall-triggered flooding in the Houston area. Flooding occurred in areas not known or expected to be prone to flooding and thus where people and businesses were not participating in the National Flood Insurance Program (flooding is not included in standard home insurance policies). Thus, the uninsured losses were estimated to be as much as $30 billion5.

 harvey

6. Hurricane Maria

In September of 2017, a deadly Category 5 storm devastated the northeastern Caribbean including the islands of Dominica, Saint Croix and Puerto Rico. Thousands of people lost their lives, making it the most deadly named storm of the 21st century. Additionally, from homes to crops to the electrical grid, the vast majority of the islands were devastated. In Puerto Rico, directly after the storm, 95% of people didn’t have power, cell service or access to drinking water. From the perspective of insurance companies, losses (including reinsurance) were estimated between $40 and $85 billion[6]. The resulting nearly 300,000 claims caused at least one major insurance company in the area to fold, as the damage was beyond even the worst case scenarios projected[7].

 maria

These are just a few of the costly disasters that insurance companies have to account for as they plan for the future. While hopefully, none of the above will ever happen to you, it’s good to know if they do that your insurance company will be able to adapt and pay out claims, even in the face of extreme catastrophe.

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