Insurance industry experts used to think it took a powerful
hurricane or massive earthquake to generate huge losses.
But in recent years, tornadoes, floods, wildfires and hailstorms
have blown away the conventional wisdom.
Last year's spring tornado season, for instance, whipped up more
than $21 billion in losses -- more than the 1994 Northridge
earthquake and more than any hurricane in the last 20 years, except
Katrina in 2005 and Andrew in 1992. Taken together, the storms were
the seventh costliest disaster in global insurance history,
according to the Insurance Information Institute.
A combination of factors puts us at higher risk for heavy
losses, say industry experts who participated in a recent Web-based
seminar presented by A.M. Best Co. Inc. and sponsored by Swiss
For one thing, more people are living in harm's way.
"Areas that were vulnerable to tornadoes have experienced
dramatic population change," says Kevin Simmons, an economics
professor at Austin College in Texas.
A tornado that would have hit a farm field a generation ago now
would wipe out a subdivision in the same location.
Development has also spread to fire-prone wild-lands, such as
the forested foothills along the Rocky Mountains. More people are
moving there for the natural amenities, and the trend will likely
continue, says Hannah Brenkert-Smith, environmental sociologist at
the Institute of Behavioral Science at the University of Colorado
at Boulder. More people means more property at risk in a fire.
More bad weather ahead
Weather patterns also play a role.
, a naturally occurring climate phenomenon that affects ocean
temperatures, helped create the "perfect setup of conditions" for
the violent tornado season last year, says Megan Linkin, Swiss Re
vice president and meteorologist.
La Nina allows cold air from Canada to meet warm, moist air from
the Gulf of Mexico while warm, dry air remains in the West. The
unstable atmosphere leads to violent weather.
Global warming could raise risks in the future.
"The sea level has already risen on the East Coast in the last
century, and it's expected it will continue to rise," Linkin says.
"I think insurers have to be aware their risk landscape is going to
Rising sea levels bring higher storm surges and increased
flooding risk when hurricanes make landfall.
Computer simulations of climate change suggest that dry areas
will get less rain, and wet areas will get more, Linkin says. That
will lead to more flooding in some parts of the country and more
droughts in others. The drought that created ripe conditions for
wildfires in the West this year was the worst since the Dust Bowl,
Linkin says. But such droughts could become more common -- more
like 1-in-20 or 1-in-10 year events, versus 1-in-75 or 1-in-100
Complexity increases risk
The growing complexity of how businesses operate has also
changed the risk of losses. A disaster not only affects the
businesses it hits directly, but the many businesses in other
locations that depend on them for supplies. And because we are so
dependent on technology, damage to computer systems and robotics
Insurers have to look at risk differently, says Andrew Castaldi,
Swiss Re's senior vice president and head of catastrophe perils in
North America. They must consider all the connections to an
industry hit by disaster.
What can we do?
The federal government already gives money to states and local
communities to prepare for disasters and mitigate hazards. The
grants pay for a variety of projects, such as efforts to elevate
buildings in flood-prone areas and stabilize soils to prevent
Research shows those efforts pay off, says Kathleen Tierney,
director of the Natural Hazards Center at the University of
Colorado at Boulder. But better planning and mitigation are needed
to reduce losses.
Some states require local governments to consider potential
disasters as part of land-use planning efforts. University of North
Carolina researchers found such requirements lead to lower insured
losses in those communities.
But, Tierney says, "The actual situation in most states and
communities right now is that land-use planners and planning
departments don't talk much to emergency management departments or
experts in disaster-loss reduction. Even if they did there may not
be political will in a lot of communities to put these measures in
Building a better house
Improvements in building materials and methods help lower
losses, says Timothy Reinhold, senior vice president of research
and chief engineer of the Insurance Institute of Business and Home
Safety. The institute has designed
buildings that can withstand most tornadoes
. The roofing industry has developed impact-resistant shingles that
hold up in most hailstorms.
But how do you get people to invest in beefing up their homes?
One way is through tougher building codes. Another is to persuade
people with incentives and education about safety.
"In the current marketplace, I'm a little pessimistic in how
much change we're going to see in building codes and voluntary
construction," Reinhold says.
Says Tierney: "These are really complex economic and political
problems that can't be solved by government alone or by the private
sector alone. There has to be a strong partnership for how do we
provide incentives for adopting, implementing, monitoring and
maintaining solutions that work. It's not that we don't know what
to do. It is how we will do it."