Hurricane Milton has caused enormous damage to the state of Florida in the past month. Almost all who suffered from the storm were not insured. It is estimated that the hurricane caused over $ 250 billion damage (bigger than GDP of many many countries), only 6 percent of this amount is going to be covered by insurance companies.
According to scientific data, global warming is making the storms more powerful. The physics behind that is relatively simple. Sea temperatures rise with global warming, and as the waters retain more heat, more energy is available to fuel hurricanes. Warmer air can absorb more water vapor, resulting in heavier rainfall on the land that hurricanes pass over. A warmer planet also produces warmer air. Additionally, a warming planet has less ice, which raises sea levels, which exacerbate storm surges that hurricane winds drive inland. The speed at which hurricanes are gathering energy is enormous, hurricane Milton went from not being a hurricane at all to having wind speeds over 250 kmPh only in 25 hours.Â
Insurance is the art of sharing the risk. The more risk neutral agent sells the insurance policy and the risk averse agent would buy it. The risk neutral agent gets more on the average basis in the long run and the risk averse agent benefits from not suffering harsh negative outcomes. In many areas in which hurricanes have become more powerful, the insurance premiums are already very high, yet many insurance companies were bankrupt because they were not able to pay their obligations according to their sold insurance policy rate. This means the basic economics behind the insurance scheme is not working because the risk is so high that the insurance companies are no longer risk averse when they face such strong hurricanes. Redesigning the houses and making it stronger is needed for sharing the risks in a schema in which one side is risk neutral.
Source: Economist
