The Financial Effects of a Natural Disaster

In today's increasingly interconnected economy, the economic fallout from a natural disaster is rarely relegated to the geographic area it hits. In fact, even natural disasters that take place thousands of miles away can shake up your portfolio here at home. 

Besides loss of life, infrastructure destruction is by far the most obvious type of natural disaster damage. But the economic consequences are rarely considered beyond what the cost will be to rebuild. 

The Unforeseen Problem

One of the biggest problems for areas affected by natural disasters is business disruption. With road, communication infrastructure and building damage, it's not uncommon for local businesses to be shut down for some time after the disaster occurs. Some smaller businesses may not ever be able to recover and will close their doors. After the devastation of Hurricane Harvey in 2017, many restaurants never reopened because they couldn't afford the cost to renovate or lost so much business from being closed that they couldn't make themselves profitable again.

Large businesses are also affected, and the costs are often passed on to consumers. U.S. oil refineries were hit hard by Harvey. Not only was it impossible for them to continue production during the storm, the damage after it was over made it all but impossible for employees to get to work and damage to the refineries themselves also affected production. This reduction in available oil was felt not just in the U.S., but also by Mexico, which gets of its gasoline from Texas.

Hurricane Harvey ended up being the costliest disaster in U.S. History, with over $125 billion in damages estimated as of January 2018. But it wasn't the only major disaster of 2017. Hurricanes Irving and Irma, wildfires in the western part of the country, and other smaller disasters combined with Harvey left a bill of over $306 billion in damages. (For related reading, see: How Stocks, Economy Will Suffer from Irma, Harvey.)

The Commodity Effect and Scarcity

But those factors only touch on how much of an effect a natural disaster can have on investment portfolios around the world.

Through the popularity of American depositary receipts (ADRs), exchange-traded funds (ETFs) and other forms of international investment diversification, the ability of U.S. investors to own shares of companies based abroad has expanded considerably in the last decade. Because of that, owning shares of any given company's stock can give an investor an interest in a refinery in Texas or a gold mine in Africa—and it can expose investors to the risks associated with these locales.

Less obvious, but perhaps even more significant, are the effects that a natural disaster can have on commodity prices. In the case of Hurricane Katrina, the storm's entry point at the Gulf coast is significant because of the fact that nearly half of the gasoline consumed in the U.S. passes through refineries that were affected by the storm. As a result, oil and gas supplies were affected immediately after Katrina made landfall. With increased gas pump prices, extra effects included diminished margins for industries from transportation to consumer goods.

Similar things happened in the copper market as earthquakes in Chile choked production and inflated copper prices worldwide.

These kinds of price increases aren't just limited to market-traded commodities. When natural disaster strikes, scarcity rules, and regular staples like food, merchandise and even housing can become commoditized as a result. (Learn more in: How to Invest in Commodities.)

Ways to Prepare Your Finances for a Natural Disaster

Insurance: Sometimes the most obvious actions are the ones we don't take. Not only can the actual disaster cause damage, but the aftermath can be just as bad. What if your employer was affected and closes its doors temporarily or even permanently? What if you or your family is injured, or you need money now? What does your homeowner's or renter's insurance cover? Does your auto insurance include a rental car should your car be damaged? Do you have disability insurance in case you're injured and unable to work? Do you have an emergency fund to make your financial ends meet until life returns to normal? Preparations like this seem like unnecessary expenses until they're needed. Talk about these questions with your spouse, employer, insurance agent and financial advisor.

Flood insurance: If you live in an area that's susceptible to flooding, it's likely that the bank administering your mortgage will require you to have flood insurance, but even if it doesn't require it, floods as a result of a natural disaster like a hurricane or torrential rain are likely not covered by your homeowners policy. Even floods caused by other events may be a tough sell. (For related reading, see: Flood Insurance: Myths and Misconceptions.)

Know what you own: If your property is damaged, the more proof of ownership you have, the better. If you have a smart phone that records video, walk around your home and make a video of every valuable item you own. Include some narration about the brand, when you purchased it and the purchase price. Also, save receipts for high-ticket items and remember to have insurance for items like jewelry and other valuables that your homeowner's policy may not cover.

If you haven't yet taken the digital plunge, it's time to gather up all of your key documents and have them scanned. There are likely numerous places in your community that can help with this or you can buy a scanner for as little as $50. Once you have your documents digitized, save them to a DVD or flash drive and give them to a family member that lives outside of your region. You can password-protect the documents so nobody else can access them. Another option is to save them in the cloud.

Act Fast: Time is an insurance company's best friend. When disaster strikes, don't waste any time contacting your insurance company. You can mentally recover later, but one of your first recovery moves should be to contact your insurance company or agent. Larger insurance companies may have disaster teams already on site to help you with your short-term needs.

The Bottom Line

Ultimately, it's difficult to imagine the extent of the economic repercussions a major natural disaster can bring about. Although there's little we can do to avoid Mother Nature's next catastrophe, we can better prepare for it—both physically and financially.