'No More Moments' Versus Investing in Resilience

Hurricane Dorian – a category 5 storm – battered the northern Bahamas on 1 September, unleashing flooding, hurling cars and shredding roofs. It tied the record for the most powerful Atlantic hurricane ever to come ashore in the Bahamas, equalling the Labor Day hurricane of 1935, according to the Associated Press.

2019 is the fourth consecutive year that category 5 hurricanes have formed over the Atlantic Ocean.¹ Between 2016 and 2018, six billion-dollar hurricanes (i.e., Matthew, Harvey, Irma, Maria, Florence, Michael) have impacted the US, with an inflation-adjusted loss total of USD329.9 billion and 3,318 fatalities.² Dorian will cause at least USD25 billion of insurance losses, according to analysis by UBS, the most of any natural disaster since 2017.³ Indeed, hurricanes have historically been the most damaging and costly weather events to affect the US, according to the National Oceanic and Atmospheric Administration (‘NOAA’).

Figure 1. Billion-Dollar Events to Affect the US (1980-2018; CPI-Adjusted)

Source: NOAA; as of end-2018.
* Deaths associated with drought are the result of heat waves (not all droughts are accompanied by extreme heat waves).
** Flooding statistics do not include inland flood damage caused by tropical cyclone events.
The confidence interval (CI) probabilities (75%, 90% and 95%) represent the uncertainty associated with the disaster cost estimates.
Monte Carlo simulations were used to produce upper and lower bounds at these confidence levels (Smith and Matthews, 2015).

So then why is there such a resistance in investing in ‘resilience’ against these climate change risks, such as hurricanes, in the US?

According to Alice Hill, Senior Fellow for Climate Change Policy at the Council on Foreign Relations, part of the answer lies in politics and the difference in level – federal or state – at which such decisions are made.

“In the US, we have no national building code. It’s a patchwork of building codes – state by state, some city by city. In some instances, we find cities who have favoured lax building codes in the hopes that they will attract greater development. And of course that can come at significant risks,” Hill said in a podcast hosted by Jason Mitchell, Man Group’s co-head of responsible investment. “It did for the state of Florida in the ‘90s. Hurricane Andrew in 1992 caused that state to have – what I call – a ‘no more moment’: huge devastation; USD 25billion, thousands of homes lost. The state then put in place one of the strongest building codes for wind in the US.”

Similarly, after Hurricane Harvey hit Houston in 2017, the city created its own building code for flooding.

Alice Hill appears in her personal capacity. Her commentary does not necessarily reflect the views of Munich Reinsurance America, Inc. for which she serves on the Board of Directors.

1. https://www.theguardian.com/world/2019/sep/03/a-historic-tragedy-hurricane-stalls-over-bahamas-causing-huge-damage
2. https://www.climate.gov/news-features/blogs/beyond-data/2018s-billion-dollar-disasters-context
3. Source: Bloomberg.

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