Expected Costs of Damage From Hurricane Winds and Storm-Related Flooding

Damage from hurricane winds, storm surges, and heavy rain impose costs on private entities, such as households and businesses, and on all levels of government. Such damage affects the federal budget in at least two ways:

• If the President declares a disaster in response to a severe storm, that declaration can lead to significant federal spending for repairs and assistance.
• When claims on the federally administered National Flood Insurance Program (NFIP) exceed the program’s receipts from insurance premiums, net federal outlays rise.

In this analysis, CBO estimates the expected annual economic losses to three sectors of the economy (residential, commercial, and public) and the expected annual costs to the federal government from hurricane winds and storm-related flooding. Those expected economic and budgetary costs represent average one-year costs based on current conditions for climate, sea levels, and property development in places at risk of severe storms. The estimates are based in part on large-scale commercial models that simulate damage from hundreds of thousands of potential storms that might occur under current conditions, along with their probability of occurring. Because expected costs account for potential damage from infrequently occurring catastrophic storms, they will be higher than actual costs in most years—but much lower than actual costs in a year when a catastrophic storm occurs.

In this analysis, CBO also estimates the shares of expected residential and commercial losses that would be covered by insurance claims or by federal aid and the shares that would be uncompensated. Finally, CBO examines five policy approaches that could reduce the magnitude of storm losses and their budgetary costs. Without policy changes, storm-related costs are likely to rise in the future because of climate change and increases in development in risky areas.

Estimates of expected costs are inherently uncertain: They are limited by available data and computing technology and by evolving knowledge about the causes of storms and the resulting damage. In addition, estimates of the shares of expected losses that would be covered by insurance policies or federal assistance are uncertain. CBO’s estimates are based on existing insurance coverage and past patterns of federal aid after disasters.

What Is CBO’s Estimate of Expected Economic Losses?

Hurricane winds and storm-related flooding are responsible for the bulk of damage from disasters in the United States. For most types of damage caused by storm surges, heavy precipitation, or high winds from hurricanes or tropical storms, expected annual economic losses total $54 billion, CBO estimates, which is equivalent to 0.3 percent of the nation’s current gross domestic product (GDP). Before compensation from insurance payments or federal assistance, those losses consist of the following (see figure below):

• Expected annual losses of $34 billion to the residential sector, including the costs of repairing homes and obtaining temporary housing;
• Expected annual losses of $9 billion to the commercial sector, including the costs of repairing buildings and finding temporary space as well as revenue losses because of disruption to businesses; and
• Expected annual losses of $12 billion to the public sector, including damage to public property and spending on recovery activities, such as removing debris.

CBO’s $54 billion total excludes some costs related to damage from hurricane winds and storm-related flooding because of data limitations. For example, that estimate does not include losses to assets that the federal government would not fully repair; expected losses to parts of the private sector other than commercial businesses, such as the energy, agricultural, and industrial sectors; and nonmonetary losses, such as the emotional cost of losing a home. In addition, CBO’s estimate does not cover other types of storms that sometimes result in federal costs, such as blizzards and tornados, or other types of natural disasters, such as droughts and wildfires.

Who Would Pay for Expected Economic Losses to the Residential Sector?

Households can expect to receive compensation for roughly half of their economic losses from hurricane winds and storm-related flooding (for the types of losses included in CBO’s analysis). However, the extent of compensation would differ greatly for wind-related losses and for losses from flooding, CBO estimates. That difference occurs mainly because homeowner’s insurance typically covers wind-related losses, whereas coverage for flood losses generally requires a separate policy—usually from the NFIP, which accounts for about 95 percent of residential flood insurance.

CBO estimates that insurance, provided largely by the private sector, would cover about three-quarters of households’ $14 billion of expected annual wind losses (see figure below). By contrast, federally provided flood insurance and federal disaster assistance would cover approximately one-third of households’ $20 billion of expected annual flood losses.

Compensation for flood losses would differ significantly for households with and without NFIP policies. Claim payments would cover roughly 85 percent of losses for NFIP-insured households, whereas federal assistance would cover about 20 percent of flood losses for uninsured households.

Who Would Pay for Expected Economic Losses to the Commercial Sector?

Commercial businesses—including those involved in wholesale or retail trade, transportation, health care, professional services, and hospitality—can expect to receive compensation for some of their losses from hurricane winds and flooding. CBO estimates that insurance claim payments would cover about 40 percent of the sector’s $9 billion of expected annual losses, including $3 billion of expected wind losses and at least $0.3 billion of expected flood losses. The amount of expected flood losses covered by insurance might be larger than $0.3 billion depending on the degree to which private flood insurance would cover losses not paid for by the NFIP. (CBO could not determine the extent of private flood insurance coverage in the commercial sector.)

How Are Storms Expected to Affect the Federal Budget?

CBO estimates that under current conditions and policies, the expected cost to the federal government—and thus to taxpayers—because of damage from hurricane winds and storm-related flooding is $17 billion per year for the major categories of related spending that CBO analyzed (see figure below). That estimate is not comprehensive because it excludes some federal costs, such as those covered by regular annual appropriations. The $17 billion figure includes the following:

• $11 billion to address losses to the public sector (the estimated $12 billion in such losses, net of required contributions by state and local governments),
• $4 billion to provide individual assistance to households,
• $1 billion to cover administrative costs associated with providing federal disaster relief, and
• $1.4 billion in implicit federal subsidies for the National Flood Insurance Program.

CBO estimates a subsidy cost for the NFIP because the program’s expected costs exceed its premiums, creating an expected annual shortfall of $1.4 billion under current conditions. Raising NFIP premiums by $1.4 billion would eliminate the expected shortfall.

The estimate of $17 billion in expected federal spending is different from the estimates of spending on disaster assistance that CBO produces as part of its baseline budget projections, which do not rely on models that calculate expected costs.

What Policies Might Reduce Expected Losses and Federal Costs?

Lawmakers could pursue various approaches to decrease expected losses from hurricane winds and storm-related flooding and to limit the effect of those losses on the federal budget. CBO examined five approaches:

• Limit greenhouse gas emissions, which would reduce projected increases in sea levels and could lessen the severity of future storms, thus reducing the likelihood that storm damage will worsen in coming decades.
• Increase federal funding to assess flood risks, because up-to-date information about current and future risks could help people make more informed decisions about where to locate homes and businesses.
• Expand purchase requirements for flood insurance and better align premiums with risks, which would increase the number of households with flood coverage and improve the financial sustainability of the NFIP.
• Expand the federal role in risk mitigation, for example by spending more on predisaster activities that would reduce damage if storms occurred or by encouraging greater use of risk-reducing measures in new construction.
• Increase the share of postdisaster assistance paid for by state and local governments, which would give them more incentive to discourage development in vulnerable areas, thereby lowering expected costs from future storms.