Catastrophes are now part of everyday life. They impact every region of the United States, are increasing in terms of frequency and severity and result in significant property damage and economic losses. Fifty percent of all property losses over the last forty years have occurred since 1990, and twenty-one of the twenty-four largest insured weather-related disasters have also occurred in the last decade.
And there is no end in sight to the onslaught of hurricanes, earthquakes, tornadoes, wind storms, ice storms, fires and floods. From 1986 to 1991, major disasters cost the federal government $3.3 billion in aid to individuals and local governments. During the next five years (1991 to 1996) federal aid quadrupled to more than $13 billion.
As massive as this federal assistance sounds, it represents only part of the losses; the insurance sector paid out billions more in claims to both individuals and commercial enterprises. The insurance industry has become the hardest hit of all commercial sectors by disasters. According to the Property Claims Service, insurers paid over $94 billion in catastrophe losses between 1989 and 1999.
As people continue to gravitate to the coast to settle, the property values of homes and commercial structures will also grow, steadily increasing the insurance industry's exposure to natural disasters. A study led by the U.S. Army Corps of Engineers determined the vulnerability of New York City's transportation system to hurricanes. The analysis indicated that if a category three storm, such as the one that struck Long Island in 1941, were to strike Manhattan today, water surging through the streets would flood all subway and rail stations, all tunnels and leave slosh marks as high as thirty feet on the World Trade Center.
Hurricane Andrew in 1992, the most costly natural disaster in U.S. history, resulted in a total economic loss of $25 billion, of which insurance companies covered some 680,000 claims exceeding $16 billion. If Andrew had struck just fifteen miles further inland, the insured losses might have reached $65 billion. Projected insured losses from a similar category four hurricane striking New York City range as high as $45 billion.
This possibility is further supported by studies conducted by Arkwright Mutual Insurance and E.W. Blanch Co. They used a natural disaster computer model to develop hurricane damage estimates in their 1998 study, The Temporal and Spatial Variability of Economic Losses Due to Intense Hurricanes: A Comparative Analysis. It states that although it is well known that southern Florida is expected to face the most frequent and severe hurricanes, the northern Atlantic coast faces the potential for infrequent, but devastating hurricanes. Intense hurricanes making landfall could cause $100 billion or more in damage in New England, New York, New Jersey and Florida. A major event around Virginia and Maryland could cause $70 billion in damage, and one in Texas or Louisiana could cause more than $50 billion in damage.
And perhaps nature has even greater surprises in store. Deep beneath the earth's surface in the Mississippi Valley lies the New Madrid Fault. The fault is named after a small town in southeastern Missouri that was devastated in 1811-12 during the worst series of earthquakes the United States has ever experienced. Registering up to 8.7 on the Richter scale, these quakes affected up to 600,000 square miles. Today, a quake of similar magnitude would affect more than a quarter of the U.S. population, with estimated property losses of $500 billion or more. According to many geologists and emergency management experts, New Madrid is a time bomb waiting to explode.
Power outages impact large and small businesses alike. According to a 1998 survey of five hundred small business owners, sponsored by Allied Signal Power Systems Inc., small businesses reported an average of three power outages during the past year, costing each business about $7,500 per day. …