How much does a landfalling hurricane cost?

Hurricanes are capable of inflicting extremely large amounts of damage when they make landfall on highly populated, urbanised regions of the U.S. coastline. Reinsurers have long had a fear of a direct hit on Miami from a major hurricane, an event which could cause over $100 billion worth of damage. The uncertain nature of the hurricane season makes it impossible to predict the losses that will be suffered but by looking back at historic storms it is possible to work out the average (or median) cost of a landfalling storm.

And that’s just what weather forecaster Accuweather have done. In an article published yesterday they have taken historic economic loss figures for landfalling hurricanes from 1980 to 2010 and worked out the median cost. The reason for using median rather than average is that Katrina skews the results a lot due to the high cost of that storm.

The result is that the median economic cost of a landfalling hurricane works out to be $1.8 billion (the average comes out at close to $9 billion). Not as high as you might think, however if you take out the lower intensity category 1 and 2 storms and look at the more severe events the number rises significantly.

Accuweather have predicted that there will be four landfalling tropical storms or hurricanes during the 2011 season. That may lead some of you to wonder why hurricanes are such a big issue for the reinsurance and risk transfer industry but bear in mind that the estimates that Accuweather worked out the median from didn’t include any inland losses or flooding from storms that don’t reach hurricane status and can actually cause more damage through torrential rainfall.

In reality hurricanes are very much an event to be wary of. The U.S. NOAA says that the annual likelihood of a $5 billion hurricane insured loss event was ~25% from 1990-2005. The annual likelihood of a $25 billion hurricane insured loss was ~5% for the same period. Technically we’re overdue a major loss as the last two seasons have been relatively benign. The NOAA say that average U.S. insured losses from tropical storms and hurricanes are roughly $5.2 billion.

We’re forecast to have a severe season this year with all of the major weather forecasters predicting a large amount of storm formation and more landfall than last year. The season has yet to get underway although right now there is an area of tropical weather in the Bay of Campeche which currently has been given a 50% chance of development into a tropical depression. It looks unlikely that it would threaten the U.S. coast even if it does intensify as the forecasts show it heading northwest along the Mexican coastline which would hinder development. However the conditions are conducive to storm development over the next two weeks with forecasters suggesting that there is the potential for storms to form quickly in the Gulf og Mexico.

Keep an eye on the storm season as it develops on our dedicated 2011 Atlantic hurricane season page.

Edit: One of our readers kindly pointed out that air traffic delays likely cause more economic losses to the U.S. than hurricanes.