A natural disaster has not struck a major metropolitan area in decades, and if one does, it could be markedly more devastating than insurance companies expect, reports a new study from Karen Clark & Company.
A new analysis reveals that more densely populated urban areas, coupled with increasing property values, will make any weather-related catastrophe surpass the 100 year Probable Maximum Losses (PMLs) that most insurers use to project insured losses.
Miami is particularly vulnerable, as a 100 year hurricane that touched down on the city would create $250 billion in losses - double what’s projected by current PMLs.
In fact, the study estimates that if Hurricane Andrew were to occur in the Miami region today, it would cause $60 billion in losses, substantially higher than the $15 billion it caused Homestead, Florida in 1992.
Part of the reason for the drastic increase is that Miami property values have risen dramatically since Andrew, from $870 billion to more than $3.7 trillion.
A similar outcome would result in Texas. The study estimates that a hurricane in Galveston would create industry losses of over $100 billion, much higher than the industry’s $40-50 billion estimated PMLs.
As a result, it argues that PMLs give a “false sense of security” and recommends that Characteristic Events (CEs) be used in its place, as CEs more accurately reflects the hazard, not the loss.
“Instead of simulating many thousands of random events, in the CE approach events are meticulously and judiciously created using all of the scientific knowledge about the events in specific regions,” it states.
It also recommends examining other metrics, such as CE to PML ratio and market share of losses, in order to gain as comprehensive a view of natural disaster damage as possible.
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