Why Are We Having So Many Costly Disasters?

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.

What's happening?

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 Re.

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. La Nina, 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 change."

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 year events.

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 wreaks havoc.

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 landslides.

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 place."

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."

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