Analyzing the financial risk of billion-dollar disasters in the United States: Simulating the frequency and economic costs of U.S. natural disasters

Abstract

The number of billion-dollar natural disasters in the United States has increased from 28 in 1980-1989 to 105 in 2010-2018. During these same time periods, the total cost of these natural disasters increased from $172 billion to $755 billion. Generating probabilistic assessments of the cost of these billion-dollar natural disasters can provide insight into the financial risks posed by these disasters while accounting for the uncertainty and variation in these disasters. This article simulates the frequency and cost of billion-dollar disasters and analyzes the financial risk of these disasters in the United States. We use a probabilistic approach to quantify and create five models. These models are created by fitting probability distributions to the historical cost of billion-dollar disasters. The cost of each billion-dollar natural disaster and U.S. GDP from 1980 to 2018 are analyzed and used. The model that perhaps fits the data best and accounts for the recent increase in the cost and frequency of billion-dollar disasters forecasts that the expected annual cost of these disasters is $91 billion, with about a 1% chance that the annual costs could exceed $500 billion. Simulating the costs and frequency of natural disasters provides an understanding of the risks of different types of disasters to the United States. It helps policymakers allocate resources effectively to build a resilient nation.