Hurricane Dorian: Measuring the Economic Impact

Hurricane Dorian, which the southeastern U.S. coast is braced for, weakened today from a Category 4 storm down to Category 3 after stalling for over 30 hours in the Bahamas and causing much devastation. At least 5 casualties have been reported in the Abaco Islands. Millions from Florida, South Carolina and Georgia were evacuated over the weekend. Authorities have warned residents to not let their guards down since Category 3 still implies a very powerful and dangerous storm.

Costs of Natural Disasters in U.S. History

Hurricanes are among the costliest natural disasters in the world, with high numbers of fatalities and extensive damage to property and infrastructure reported in the past. Hurricane Katrina is the most expensive natural disaster in U.S. history with an inflation-adjusted cost of $167.5 billion, according to the National Centers for Environmental Information (NCEI), which began records in 1980 and measures insured and uninsured losses. According to the NCEI, the U.S. has seen 250 weather and climate disasters in the last three decades where overall damages/costs reached or exceeded $1 billion. The total cost of these 250 events exceeds $1.7 trillion in 2019 dollars.

Insurance Industry

UBS analysts expect Dorian to cause insurance industry losses of up to $25 billion, according to Bloomberg. This would make it the most expensive natural disaster for the industry since 2017's Hurricane Maria, according to data from the Insurance Information Institute. The non-profit estimates that 1.7 million single-family homes in Florida are potentially affected in a Category 3 storm with a total reconstruction value cost of $372,102.5. Insurance industry losses include property losses only and exclude flood damage covered by the federally administered National Flood Insurance Program.

UBS says the industry faced a record bill of $135 billion in 2017 and has managed to maintain excess capital of $30 billion due to the relatively few major disasters since then. Dorian's losses will erode this capital and lead to a hike in prices, said UBS. Among insurance companies, analysts recommend shares in Lancashire Holdings, Beazley PLC and SCOR SE and named Swiss Reinsurance Company Ltd as their least preferred stock.

U.S. Stock Market

Historically, the U.S. stock market is relatively unaffected by major storms despite their heavy costs. "Although the devastation a major hurricane causes can’t be denied, it is worth noting that equity markets take the storms in stride," said Ryan Detrick, Senior Market Strategist for LPL Financial, in a note on Friday. "In fact, a month after the 15 most costly hurricanes to ever hit the U.S. formed, the S&P 500 was higher 9 times with a solid median return of 1.2%"