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Darla Moore School of Business

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Multidisciplinary research finds natural disasters have a long-lasting impact on economy, financial well-being

Natural disasters are big business. Hurricanes, tornadoes and floods can wreak millions, if not billions, of dollars of damage in one fell swoop. Four Moore School faculty are focusing their research on the economic preparation for and aftermath of natural disasters.

One research topic is centered on the financial impact of natural disasters on bank borrowing capacity. While it seems anyone with good credit or existing capital can get a bank loan, banks have a certain limit they can loan out at any given time. When a natural disaster like a hurricane happens in Florida, a Southeastern bank will be issuing loans to the affected area so impacted residents can rebuild. If that same bank has branches in states unaffected by the hurricane, companies in those unaffected areas could be negatively impacted.

If a company in Georgia that uses that same bank decides to expand but needs a loan, they could be temporarily denied if that bank has already reached their loaning capacity.

“This is the spillover effect of natural disasters from common banks,” said Ai He, a finance assistant professor in the Moore School since fall 2019. “The larger the bank, the more they are connected. It can have a negative impact on the company [looking to expand] because they can’t borrow what they want, and it takes time to find other banks” and go through the loan application process, especially for a business.

For her research, which is in the process of being published, He looked at more than 100 large U.S. banks and 28 natural disasters, including hurricanes, tornadoes and wildfires, between 1990-2016 to see how borrowing was limited just after the natural disaster occurred. Each of the natural disasters studied caused more than $1 billion in damages to the affected areas.

From those 100 large U.S. banks within that time span, more than 2,000 companies’ borrowing ability was negatively impacted by these natural disasters.

Another team of researchers, economics assistant professor Tamara Sheldon and co-author economics assistant professor Crystal Zhan, concentrate their research on the impact of natural disasters on home ownership. Sheldon has been part of the Moore School faculty since 2015, Zhan since 2013.

Sheldon and Zhan’s research was published in the Journal of the Association of Environmental and Resource Economists in November 2019. They determined individuals who migrate to areas that have experienced a natural disaster in the previous couple of years are less likely to purchase a house than rent.

“This effect is the largest for coastal disasters and becomes larger up to 12 percentage points with disaster severity,” Sheldon said. “Climate change is causing an increase in frequency and severity of natural disasters, as we have experienced in South Carolina in recent years. This will have major consequences for the economy as a whole as well as for households’ finances, health, housing/location decisions and more. We are interested in understanding these impacts, which can help inform future policymaking to prepare for and reduce impacts of future disasters.”

Sheldon and Zhan looked through the National Oceanic and Atmospheric Administration’s National Climatic Data Center’s storm events database for declared natural disasters over a 15-year span from 1996 to 2011 to inform their research.

“Specifically, we define a severe disaster as a disaster that caused three or more fatalities, as evidence suggests these disasters are more likely to receive national news coverage,” Sheldon said.

To ensure a larger-scale natural disaster doesn’t significantly change their results, they did what they call a “robustness check,” omitting Hurricane Katrina as an example. Their research indicates their results are not driven only by a catastrophic hurricane like Katrina — other disasters also influence homeownership rates.

Sheldon and Zhan also found, in another forthcoming paper on disasters and migration being published in a World Scientific Handbook, that large disasters result in immediate and lasting outmigration, when individuals move away from an impacted area.

“The economy will change with more natural disasters,” Sheldon said. “Natural disasters make people more likely to rent. They may want to move further away to higher elevation areas because it seems less risky.”

When it comes to the risks of natural disasters, clinical associate professor Robert Hartwig has studied the economic impacts of events like hurricanes, wildfires and tornadoes for decades.

Prior to joining the Moore School in 2016, Hartwig was the president and an economist for the Insurance Information Institute in New York. Currently also the director of the Moore School’s Risk and Uncertainty Management Center, Hartwig has noted in numerous media articles that more individuals and businesses are being impacted by natural disasters — not because there are necessarily more disasters but because areas hit by hurricanes and wildfires are seeing sharp increases in their population.

Hartwig said that examples of this behavior can be seen across the United States. When Hurricane Andrew struck Miami in 1992, fewer than 14 million people lived in Florida. Yet, when Hurricane Dorian threatened in 2019, more than 21 million called Florida home.

“Hurricane risk in Florida now consumes more of the global insurance industry’s capital than any other risk worldwide,” Hartwig said. “California wildfires provide another vivid example of people knowingly and willingly moving into harm’s way.”

In the past several years, record wildfire losses have occurred, in part because of California’s prolonged drought, but also because of large numbers of new, expensive homes built in areas prone to wildfires, Hartwig said.

“The obvious result: more claims when an inevitable wildfire rages,” he said.

Since more structures and people are in the way of these natural disasters, average annual insured losses are exponentially increasing. Hartwig said that average annual insured disaster losses between 1980 and 1989 totaled $5 billion. For each successive decade since the ‘80s, the average annual insured loss has increased $10 billion, so by 2010-2019, average annual insured disaster losses totaled $35 billion.

Unsurprisingly, insurance premiums are also rising for property owners who live in areas impacted by natural disasters.

Hartwig said building officials should be learning lessons from the natural disasters and the increasing insured losses by building more substantive structures.

“Rebuilding in the same spot without making any improvements invites a disaster once again,” Hartwig said. “But if we rebuild smarter and stronger, that is a benefit.”

As noted in Moore School faculty research, natural disasters have numerous direct and indirect economic impacts, and with increasing populations in disaster zones as well as seemingly more powerful hurricanes, the financial toll these take will continue increasing.


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