Living in the Midwest presents its own unique set of lifestyle factors. In exchange for our landlocked boundaries, we are able to enjoy the experience of all four seasons (sometimes within the same week!) And while we do not get to enjoy beach-front property, we also do not have to worry about being impacted by the Category 4 hurricanes dominating the news headlines… or so we may think.
It is extremely likely that you will feel the long-term impact of a hurricane, even if you have avoided the path of storm waters by living in the good ole Midwestern United States. While some of the economic and financial consequences are obvious, others might be creeping into your budget without notice.
The following list contains the top ways a hurricane impacts the Midwest:
#1: Hurricanes Take a Significant Toll on the Economy
This point is the most obvious, so we will get it out of the way first: Hurricane damage is felt nationwide through its impact on the economy. Of course, this pales in comparison to the suffering that is endured by people who lose their home and all of their belongings – if not also their lives. From the moment aid is mobilized, the tolls start ticking.
With gale-force winds, monstrous rainfall and subsequent flooding, it is no surprise that hurricanes are among the most destructive of all natural disasters. While damages from August 2017’s Hurricane Harvey in southern Texas are not yet finalized, Harvey and 2005’s Hurricane Katrina are neck-in-neck for the top spot – with damages for Katrina ringing in at $165 billion, and more than 1,800 casualties in the New Orleans area.
Of the top 10 most-expensive natural disasters in the United States, all but three are hurricanes. Rounding out the top five on this list are:
- Hurricane Maria – Ranked 3rd, at an estimated $91.8 billion
Puerto Rico, September 2017
- Superstorm (Hurricane) Sandy – Ranked 4th, at $72.2 billion
New York, October 2012
- Hurricane Irma – Ranked 5th, at an estimated $51 billion
Florida, September 2017
One of the first places we are likely to feel the economic toll of a hurricane is at the gas pump. Many oil refineries are located in coastal areas – particularly the Gulf Coast — as well as drilling operations and other infrastructure that can result in costly outages in the wake of a hurricane. Financiers note that gas prices soared 40 cents per gallon after Hurricanes Harvey and Irma in 2017, and continued to remain high before stabilizing after several months.
#2: High Claim Volume Creates Spikes in Insurance (and Reinsurance) Pricing
The real value of having insurance is in reducing our exposure to risk. The right mix of insurance provides the peace of mind that you and your family will not have to face significant financial losses in the event of a car accident, flood, fire, business interruption, or other unforeseen mishap. So, in taking on the financial responsibility of protecting the general public from their exposure to risk, the insurance companies are taking on a lot of risk themselves… right?
News flash: Insurance companies insure themselves. It’s like “Inception” for the insurance industry. Primary insurers purchase financial protection for their overall risk from reinsurers, who are essentially insurance companies for insurers. By doing this, the insurance company has a “back-up plan” to cover its own losses, in case a disaster were to result in multiple claims being filed by their policyholders all at once. It plays out like this:
Example: Jane Doe owns a home in Anytown, and purchases her homeowner’s insurance through a leading local company called Schmebb Insurance. Schmebb has a large, growing book of business, and purchases reinsurance through a company called Backup Re. If a flood hit Anytown and resulted in Jane and all of her neighbors filing claims for millions of dollars in damages, Schmebb could rely on Backup Re to ensure that they have sufficient funds for all of the claims to be paid out at once, without depleting their claims-paying ability for any other near-future mishaps.
Reference: scef0002 on SlideShare, Dec. 2011
The key takeaway illustrated in the infographic above is that insurance companies have a sort of “trickle down” system for risk management to help back up their ability to pay claims to policyholders in need – particularly, after a flood, fire or other natural disaster impacts thousands of people at once. Without reinsurance and proper planning, one such event could render an insurance company bankrupt.
When an insurance company has to dig deep into their pockets to pay out a huge volume of claims, it is almost guaranteed that they will attempt to stabilize their reserves by raising their rates. But this is not a process that will happen overnight. In the aftermath of Hurricanes Florence and Michael, reinsurance prices are expected to harden in late 2018 and into 2019. Primary insurers will likely follow suit in the months after purchasing their reinsurance.
#3: Flood-Damaged Cars Creep into the Market
Mr. Wormwood of Roald Dahl’s ‘80s-era masterpiece, Matilda, makes a living by disguising rundown cars as drivable. For those who are more familiar with the movie adaptation, Mr. Wormwood (played by Danny DeVito) shows his daughter Matilda how he uses a drill to turn the mileage on a vehicle backwards so he can sell it for top dollar. The way this plays out in real-life after a hurricane is not so different:
- Step 1: An insurance company declares the flooded vehicle a total loss.
After a hurricane’s catastrophic rainfall, a policyholder would likely file a claim on their vehicle for the damages. When the car is declared as a loss, the owner pays their deductible, and the insurance company takes the vehicle and the title.
- Step 2: The flooded vehicle is turned over to be salvaged.
In an attempt to recoup some of their losses, the insurance company will turn the car over to a salvage yard to retrieve any undamaged parts or scrap metal. But, since qualifications vary by state, some vehicles can be shipped to a state where they do not require a salvage title.
- Step 3: The salvaged vehicle is shipped to another market and placed for sale.
Anyone who is shopping for used cars anywhere in the United States should exercise caution in evaluating their options, and particularly if the price is “too good to be true.” You can also use the VIN number to search a car’s history and see if it came from a flood-damaged area.
Kelley Blue Book estimates that as many as 40,000 vehicles will be total losses due to Hurricane Florence. Because of this, buyers should avoid cars that have a musty or moldy smell, and should look closely for rust, dirt buildup, water lines or discoloration on the car’s interior. When car shopping, it is important to take a used vehicle for an inspection before purchasing to detect any damages – including flood damage.
Prepare for Weather Mishaps with the Right Insurance
If you live in the Midwest, you know that you can’t control the weather – but the right mix of insurance can give you the comfort in knowing you have a plan in place for whatever Mother Nature throws at you. Additional discounts are available when you combine coverage for all of your most-prized possessions, from your home to your vehicle and beyond.
At Webb Insurance, we understand the weather-related considerations for your St. Charles and St. Louis-area property. Many St. Charles homes located along the riverfront are on a floodplain, and require specialized homeowner’s insurance to address all of the potential risks. Contact our team of insurance brokers today to evaluate your homeowner’s coverage, or request a free quote here.