How a Disaster’s Economic Impacts Are Calculated

Tropical storm Harvey had not stopped raining on Texas before the first estimates emerged as to how many billions of dollars in damages would result from the storm. Initial estimates from insurance companies like Hannover Re put the number at $3 billion. In a note to clients, JP Morgan estimated that the insurance industry could lose $10 to 20 billion from Harvey, making it one of the top 10 costliest hurricanes to hit the U.S. Enki Holdings, a consultancy that calculates the risks and costs of various natural disasters, said Monday afternoon that its estimates for Harvey damages had reached $30 billion. It’s likely, though, that none of these estimates will end up being accurate. “It’s a pretty tough business—you don't really know what’s on the ground,” Tobias Geiger, a researcher from the Potsdam Institute for Climate Impact Research, told me, about forecasting the impact of disasters. “A good ballpark would be if you’re off by a factor of two.”

There are two different types of damages tallied from natural disasters: direct damages, which are caused by harm to physical structures like buildings and the belongings inside of them, and indirect damages, which are caused by people losing their incomes and jobs. Both direct and indirect damages are best tallied months or years after a storm has taken place, because people have made insurance claims, and if they’re not insured, they know how much money they spent rebuilding. But dozens of companies try to predict damages earlier than that, both because it is useful for insurers to know what their potential costs may be, and because government officials may need to offer economic aid for residents.

Every company that predicts damages from disasters has a different method for doing so. Enki, for example, has a computer simulation that uses the laws of physics to estimate what the forces of nature such as wind, waves, and flood waters would do to the properties it is predicted to hit. The company comes up with the values of the properties in a storm’s path using data it has tabulated on what sits on parcels of land across the country. Risk Management Solutions (RMS), a catastrophic-risk-modeling company based in California, has constructed a hurricane model that simulates tens of thousands of potential hurricanes to advise the insurance industry on the likely impacts of Harvey. RMS can use wind speeds to calculate what percentage of the home may be damaged by the storm, said Tom Sabbatelli, a senior product manager with the company. Once it gets information from insurers on the how much particular properties are worth, RMS can estimate the cost of the damages based on those percentages.

These models are pretty accurate when accounting for the damage caused wind speed and storm surges, which are typically the two factors the cause the most damage from a hurricane. But Harvey was not a typical hurricane. Rather than just hitting the coast and moving on, it crept inland and lingered, causing huge amounts of flooding in Houston and surrounding areas. Watson estimates that 30,000 square miles have seen over 10 inches of rain. Experimental flood models he’s run show that impacts from Harvey are four to five times higher than those of a typical hurricane. “If Harvey had been a normal Category 3 or 4 hurricane, we’d be talking about a $4 billion storm—from a national perspective, it would not have been a huge event,” he said. “The problem is that Harvey moved inland and turned into a big, wet, tropical storm.”

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