This week we talk about the Pacific Palisades, Hurricane Katrina, and reinsurance. We also discuss developed property values, arsons, and the cost of disasters. Recommended Book: The Data Detective by Tim Harford Transcript Natural disasters, whether we’re talking about storms or fires or earthquakes, or some combination of those and other often related issues, like flooding, can be incredibly expensive. This has always been true, both in terms of lives and material damage caused, but also in terms of raw currency—the value of stuff that’s destroyed and thus has to be rebuilt, replaced, or in some rare cases partitioned off so that similar things don’t happen in the future, or because the space is just so irreparably demolished that it’s not cost effective to do anything with the land, moving forward. The four most expensive natural disasters that we’ve been able to tally—so this doesn’t include historical disasters that are far enough back that we can’t really quantify the damage, due to an inability to directly compare, or insufficient data upon which to base such quantification—the top four that we can line up against other such disasters and compare the numbers for are all earthquakes. The earthquake in Japan in 2011 that, in addition to causing a lot of damage unto itself, also caused the disaster at the Fukushima nuclear plant tops the list, with a cost at the time of around $360 billion, which would be nearly $490 billion in today’s dollars. The second most expensive natural disaster is also an earthquake in Japan, this one hitting a region called Hanshin in 1995, causing about $200 billion worth of damage in mid-90s money, which would be about $400 billion, today, and the third was an earthquake not too long ago, the 2023 quake that struck along Turkey and Syria’s border, causing something like $160 billion in damage. The fourth costliest natural disaster hit China in 2008, causing around $130 billion in damage, which is about $184 billion in today’s money. These disasters also caused a lot of casualties and deaths; about 20,000 people died in that most-costly, nuclear-incident-triggering quake, while nearly 88,000 were killed in that fourth-most-costly, Chinese one. The Great Hanshin quake, in comparison, lead to somewhere around 6,000 deaths: which is still just a staggering human loss, but it’s an order of magnitude less than in those other comparable disasters; which hints at the trend we see with these sorts of events—the scale of wounded and killed doesn’t necessarily correlate with the scale of costs associated with damaged and destroyed infrastructure and other assets. The costliest natural disaster in US history, as of the first week of 2025, at least, was Hurricane Katrina back in 2005, which all but destroyed the city of New Orleans and much of the surrounding area, causing around $125 billion in damage, which is equivalent to about $195 billion, today, but it only led to around 1,400 deaths: again, all of those deaths absolute tragedies, and any disaster that causes that many deaths is an historical event. But looking at the raw numbers, that’s a shockingly low figure compared to the sum of the monetary damages tallied; it’s actually remarkable as few people died as they did, looking at this storm and it’s impacts through that lens. What I’d like to talk about today is another natural disaster, this one ongoing as I record this, that looks primed to take the record of most-costly, in terms of money, US natural disaster from Katrina, and some of the implications of this disaster. — Part of why disasters in the US, natural or otherwise, tend to result in fewer fatalities than those that occur elsewhere is that the US is a very wealthy country with relatively high-quality and widely dispersed infrastructure. There are quibbles to be voiced about that claim, as many recent reports indicate that said infrastructure isn’t terribly well maintained, and that the country’s healthcare setup and relatively low pay and support for the sorts of people who save lives and rescue victims in the midst of such disasters raise questions about how long this will continue to be the case; some of these high-quality systems are somewhat fragile, in other words, and won’t always perform at the level they arguably should. That said, in general, when need be, US government institutions—federal and regional—are capable of throwing money at issues until they mostly go away, and they have a lot of decent resources to leverage when need-be, as well. Americans in general also have reasonable amounts of resources to call upon, on average at least, when they need to flee town and stay elsewhere for a while until a storm subsides, for instance. This is all on average, and we tend to see the gaps in that generality when disasters hit, and Katrina is a perfect example of this disaster illuminated dichotomy, as a lot of the country’s least well off people, who have arguably been let down by the system and their government in various ways, were unable to do what everyone else was capable of doing, and were thus stuck in ramshackle and dangerous accommodations, and in some cases weren’t rescued because of the nature of the infrastructure that was meant to help protect them, but which was ultimately incapable of doing so. Other people were shuttled by those entities to other parts of the country while the disaster was being handled, and some were never brought back—it was all a pretty big scandal. Looking at the averages, though, the US tends to experience disasters that are more expensive in terms of money than lives because there’s more costly infrastructure in place, more valuable assets owned by pretty much everyone, compared to many other nations around the world, at least, and folks are generally capable of getting out of the way of stuff that might kill them—at least when we’re talking about things like storms and fires. Case in point is the ongoing, as of the day I’m recording this, jumble of wildfires that are menacing, and in some cases demolishing, parts of the Greater Los Angeles area in Southern California. As of the day I’m recording this, a day before this episode goes live, there are two primary fires still spreading, designated as the Eaton and Palisades fires, those names based on the regions in which they started to flare out of control, and several smaller ones called the Kenneth, Hurst, and Lidia fires. The Palisades fire is currently the largest, having burned about 24,000 acres, followed by the Eaton, which has consumed around 14,000 acres. The Kenneth, Hurst, and Lidia fires have burned around 1,000, 800, and 400 acres, respectively. That’s…not huge. Tens of thousands of acres is a decent sized plot of land, definitely, but for comparison, the Smokehouse Creek Fire that burned through parts of Texas and Oklahoma in 2024, and which became the largest wildfire in Texas history, consumed more than 1,100,000 acres. The Park Fire, which plagued Northern California in mid-2024, is the state’s largest-ever arson-caused fire, and it consumed nearly half a million acres. So a total of just of 40,000 acres or so for this new collection of fires is piddly, within that context. The difference here is that both of those other fires consumed mostly, though not entirely, undeveloped land. And such land, while not value-less, is not the same kind of asset, in terms of dollars and cents, as heavily developed, with homes and businesses and electrical cables and roads and other such infrastructure, land tends to be. These new, Southern California fires are smaller than those other, big-name wildfires, then, but they’re also consuming some of the most expensive real estate, and the properties and other assets build atop that real estate, in the world. As of right now, the Kenneth and Lidia fires are completely contained, and the Hurst is getting there. The Eaton and Palisades fires, the two largest of the group, are still mostly uncontained, however, due in part to wild and dangerous winds that are making containment efforts difficult, in some cases preventing aerial efforts, and in others making conditions extra risky for people on the ground, due to the dynamic and quick-moving nature of things. Given all of this, and again, given that these fires are burning homes worth tens of millions of dollars, located on coastal land that’s in some case worth around the same, it’s perhaps no surprise that analysts are already projecting that these fires could cause something like $50 to $150 billion in economic losses; and for comparison, the aforementioned Camp Fire in Northern California, which also consumed some fairly expensive homes and real estate, in addition to the undeveloped park land it consumed, only tallied about $30 billion in damage, all told, while the fires that hit Hawaii in 2023 added up to just $5.7 billion. Of that $50-150 billion total, it’s estimated that around $20 billion will be covered by insurance, which represents a staggering loss for those without any, or without the proper insurance, but also potentially represents a huge loss for residents of California, as the state has an insurance of last resort scheme called the FAIR Plan, which is a privately run, but state-created entity that serves those who can’t find insurance via conventional, private insurers. And often, though not always this means those customers are in areas that are too expensive or too risky for traditional insurance companies to operate in. In practice, that usually means insurers of last resort have a portfolio full of risky bets, and the plans they offer are more expensive than usual, and tend to provide less coverage and benefits than the conventional stuff. In these sorts of situations, though, we have a whole lot of risky bets than have suddenly come up snake eyes, this FAIR Plan suddenly having to pay out billions of dollars to their customers
