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The Impact of Weather

By Gary Kerney

A recent study examined how weather affects the U.S. economy, concluding that even minor changes in weather have a significant impact. Weather plays a role in many aspects of the economy, including travel, commerce, agriculture, and manufacturing. Severe weather events such as tornadoes and hurricanes obviously have an effect, but so do less severe conditions such as hot and cold temperatures or rainy days. Some scientists have estimated that the influence of routine weather can cost 3.4 percent of the entire U.S. gross domestic product.

The National Oceanic and Atmospheric Administration (NOAA) released a statement in June that events in the first half of 2011 put it among the most extreme weather years in history. According to Property Claim Services® (PCS®) estimates, insurers incurred nearly $15 billion in damages from tornadoes and severe weather that ravaged large regions of the central and southeastern United States in April and May. A large insurance broker estimated the total economic costs associated with the severe spring weather to be more than $21 billion.

The U.S. Bureau of Labor Statistics believes that a magnitude 7.8 earthquake in Southern California would affect hundreds of thousands of businesses and millions of workers. The impact of the earthquake would have serious implications for jobs in healthcare, retail, manufacturing, and education. The effects would ripple through the entire economy and affect businesses not even close to the quake site. Many of the repercussions would arise from supply chain disruptions. Supply chain disruptions, similar to those experienced following the earthquake and tsunami in Japan in March 2011, could have drastic and crippling consequences for production, reputation, competitiveness, and shareholder value.

Severe weather or high-severity events can make a lasting imprint on the lives of so many. Just as companies need viable business continuity plans, homeowners too need to consider what they can do to diminish the negative effects of a disaster.

If one lesson can be learned from the severe weather in the first half of 2011, it is that there is no time to prepare for economic injury in the face of disaster. The rapid advance of wildland fires or the unexpected occurrence of earthquakes, tornadoes, hurricanes, hail, damaging winds, and storm surge leaves little time to prepare homes or businesses for the extensive damage those perils can cause to lives and livelihood. It is so much more prudent to plan a strategy beforehand.

In the article he wrote for this publication, Frank Coyne noted the strategy has to "encompass more than traditional property insurance." Purchasing insurance is often not the complete solution.

A lack of insurance or inadequate insurance protection can prevent reconstruction or the completion of repairs in a timely fashion. We have seen this after many major catastrophes, affecting such important occupancies as medical facilities and universities. Needless to say, functioning hospitals are critical in the aftermath of disasters.

In many cases, having only some insurance is far from adequate. For example, flood insurance and earthquake insurance cover very specific perils that are not included in most homeowners policies. Being underinsured will likely lead to damage not being repaired or, even worse, result in abandoned properties. This happened in parts of the city of New Orleans following Hurricane Katrina in 2005. Six years later, some of those properties remain unrepaired and vacant.

With the wide-ranging destruction of property in many catastrophes, there is a subsequent loss or severe reduction in property tax revenue. Damaged buildings don't carry the same value as intact homes and businesses. Lost taxes impair the ability of local, state, and federal governments to restore such necessary services as fire, police, and public works departments. In previous catastrophes, those buildings and the equipment housed in them were destroyed and not replaced because of a lack of funding. If that happened in your town, would you want to move back and rebuild your home or business? The answer is, not likely.

Figure 1
Billion-Dollar Climate and Weather Disasters (1980–2010*)


Disaster Type # of Events Percent Frequency Normalized Damages ($B) Percent Damage
Tropical Storms, Hurricanes 27 27.2% $367.3 50.6%
Severe Weather 21 21.2 41.4 5.7
Heat Waves, Droughts 15 15.2 185.2 25.6
Nontropical Floods 15 15.2 74.3 10.2
Fires 10 10.1 19.2 2.6
Freezes 6 6.1 18.6 2.6
Blizzards 2 2.0 11.9 1.6
Ice Storms 2 2.0 5.9 ~0.8
Nor'easters 1 1.0 2.2 ~0.3
  99   $726.0  

Weather plays a role in many aspects of the economy, including travel, commerce, agriculture, and manufacturing. Severe weather or high-severity events can make a lasting imprint on the lives of many. A lack of insurance or inadequate insurance protection can prevent reconstruction or the completion of repairs in a timely fashion. It is important that everyone identify the measures they can take beforehand to reduce the negative impact of a disaster. This map depicts weather-related events that have had the greatest economic impact from 1980 to 2010.

Billion-Dollar Climate and Weather Disasters

*Important note: An event is counted if total damage estimate exceeds $1 billion. A single event may affect multiple states.

Increased costs and disruptions associated with higher unemployment also often occur following a disaster. When small retail and commercial entities close their doors because of insufficient capital to make repairs or recapture business lost to undamaged competitors, employees lose jobs and income, which makes it more difficult for them to rebound from the disaster. What would you do if you lost your job because of the weather?

Employers who are able to continue business should consider altering or modifying work schedules and hours of operation so employees have time to tend to their own property losses and the needs of family and friends.

There are many ways to overcome the bruising features of a disaster. It is important to recognize the risk you live with. It is even more important to identify the measures you can take beforehand to reduce the negative impact a disaster can impose on you, your family, and your community.

Gary R. Kerney is assistant vice president of ISO's Property Claim Services®.

 

 

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