Monday, October 29, 2012

How to Measure Hurricane Sandy's Damage

Indian Wells Beach, East Hampton, NY, 10-29-12.
Photo by JT Marlin.
What is the cost of Hurricane Sandy compared with Hurricane Irene? A number of estimates are already appearing and the dollar amounts are already very large. My concern is that erroneous statements were made about Hurricane Irene that should not be repeated, for example that it was the fifth-costliest hurricane on record. A ranking based on dollars that does not adjust for inflation is just not useful.

The suggestion has already been made that this will be the costliest East Coast hurricane ever. The Wall Street Journal has compared satellite photos of Sandy and Irene and shows that Sandy is much larger.  The WSJ concludes that Sandy will cost more than its estimate of a $15 billion cost for Irene. On the other hand, television interviews with officials in Westchester indicate that Hurricane Irene was more severe.

Advance Measures of Danger

At the moment two main measures of the significance of a storm are provided by meteorologists. They are interrelated and both point to likely wind speeds. The public needs at least one more  measure that shows the likely economic impact of flooding, and I suggest under the third heading below what the measure might look like.

1. Wind-Speed Category. A Category 1 hurricane means wind speeds of 74-95 mph on the Saffir/Simpson Hurricane Scale. Hurricane Irene petered out on its way north. Hurricane Sandy on its way north has been affected by two other independently originating storms, as well as by tidal factors.

2. Barometric Pressure. The Christian Science Monitor has posted a lucid summary of the importance of this measure of hurricane severity. (It also repeats the error cited above about the cost of Hurricane Irene - I will return to this.) Ordinarily, the barometric pressure is related to wind speed. The normal sea-level barometric pressure is 1013.5. During a hurricane the eye of the storm shows the lowest barometric pressure. The lower the pressure, the higher the winds. During the afternoon today, the barometric pressure at the eye of Hurricane Sandy fell from 943 to 940, which is a level associated with Category 3 or Category 4 winds. The lowest barometric pressure that has been measured in a U.S.hurricane is 882 for Hurricane Wilma. Hurricane Carla was the tenth-lowest, 931. The National Hurricane Center list of the most intense hurricanes does not follow the Millibars ranking exactly, since Katrina and Wilma are not in the order one would expect.

                                        Ten Most Intense Hurricanes
Name (After 1953) or Location
1.Florida Keys
5.Indianola, TX
6.Keys, FL
7.Lake Okeechobee, FL
8.Miami, FL
Notes: Wind Category is at Landfall. Category 5 on the Saffir/Simpson scale means >155 mph winds for at least one minute. Category 4 means 131-154 mph for at least one minute. Category 3 means 111-130 mph for at least one minute.  Millibars are mercury readings of barometric pressure.
Source: Based on NOAA, National Weather Service, National Hurricane Center, Blake and Gibney, 2011.

3. Flood Surge Impact. However, most of the damage is caused by the delayed impact of the flooding surge (the hurricane equivalent of a post-earthquake tsunami). We need a new indicator of likely flood damage, which would have to take into account the economic value of property in the track of the hurricane, the sea level of the land, and the size of the expected surge.  The Flood Surge Impact index could take into account the tides (the full moon is adding to the surge) and the geography of the surge.

Retrospective Measures of Cost

There are seven basic ways to measure and adjust the cost of a hurricane. They overlap:

1. Loss of Life, or Injury.  On the simple measure of number of lives lost to a hurricane, Hurricane Irene did not even rank among the 100 most costly hurricanes. Preparedness is much better than it used to be and saving lives is a priority. Mayor Bloomberg has made clear that the overriding priority of the City of NY is to avoid loss of life. Hurricane Irene took one life and as far as Mayor Bloomberg is concerned that was one too many. The mayor has generated a scientific approach to evacuation based on flood probability maps. Also contributing to reduced fatalities is the steady improvement in U.S. Government warning systems via the National Weather Service and the National Hurricane Center,  and the FEMA network of state notification and assistance.  Loss of life can be converted to a dollar figure via life insurance losses or a value that economists impute to a person's remaining working life. Injuries also represent a cost either to the individual or to health insurance plans (private or governmental), and injuries that result in a disability have a working-life cost that can be attached.

2. Loss of Physical Property.  Property can be destroyed by wind or flooding or a combination. This means a loss of wealth of the property owner. If the loss is charged against revenue, it means a loss of revenue. (A building may be a depreciated asset; loss of inventory is likely to be expensed.) The first impact may be flying debris, the lifting off of roofs, the flattening of flimsily constructed buildings. The delayed effects include (a) loss of electricity from downed power lines, which means that many perishables have to be thrown out, and (b) flooding, which destroys or rends temporarily useless all kinds of property such as books and electronics, especially if the flooding is from salt water, which MTA Chairman Joe Lhota says is especially damaging to rail signal and power connections. It also includes business interruption, which is the next category.

3. Business Interruption. Increasingly, businesses insure not only against loss of property but the loss in profits that comes from an interrupted business. When a restaurant or a theater remains closed because of floods that prevent people from showing up, it is hard to make up the loss because the business space has a limited capacity. Figures on the cost of hurricanes increasingly include business-interruption losses, which bias upward the later numbers.

4. Insured vs. Uninsured Losses. Insurance companies are most interested in the total of insured losses. But from an economic perspective, losses to individuals (e.g., workers paid by the hour) are real. The money that would have been spent in the community by the individuals is missing. The National Hurricane Center uses a simple formula to estimate uninsured losses - it doubles the number for insured losses.

5. Private vs. Public Insurance. Flood insurance is provided by the National Flood Insirance Program as a last resort because private insurers have been reluctant to provide it. Individuals pay a premium for this insurance. After a hurricane, there will be payouts. FEMA programs also provide relief to individuals. The National Hurricane Center in its estimate of damage adds in a number for flood damage provided by the National Flood Insurance Program.

6. Federal, State and Local Assistance. Emergency assistance by FEMA, other Federal bodies (the Army Corps of Engineers, for example), states (emergency response teams) and localities (police, fire, sanitation, ambulance) must be factored in as costs.

7. Adjustments for Inflation, Business Activity. Two kinds of adjustments are typically made to comparisons among hurricanes. One is to adjust cost figures for inflation. The Christian Science Monitor story cited above incorrectly describes Hurricane Irene as the fifth mostly costly hurricane in U.S. history. As I explained last year, that label only works if we are under the delusion that a dollar 100 years ago should be valued the same as a dollar today. (Apart from the fact that business-interruption costs are increasingly included in hurricane losses, adding to the size of the numbers.)  There are widely available cost-of-living indicators to refer to, such as this one from the BLS. The business activity measure relates the hurricane to the value of the real estate through which the hurricane travels. This is a good predictor of cost and is also a factor to consider in comparing the impact of a hurricane traveling the same path in different years.

I have written on this topic last year on Huffington Post and my CityEconomist blogsite.