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.

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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 in these risky areas. And between 2023 and 2024, the number of homes in the very expensive Pacific Palisades area, which is high-risk for wildfires, nearly doubled to around $6 billion of covered assets in that zip code, alone. It’s been estimated that the plan could have something like $24 billion in total losses from this cluster of ongoing fires.

The FAIR Plan isn’t government-funded: instead, if it runs out of money because of high levels of payouts, private insurance companies foot the bill, which will place further strain on those insurance companies, which are already expected to be staggered by losses across the region, but also then raises insurance prices for everyone in that area, moving forward, which could further inflate expenses for the state’s tens of millions of residents, while also possibly incentivizing businesses to move elsewhere, which would reduce taxflows to state coffers, and over time cause even more financial problems.

Reinsurance claims could muddle some of this math—reinsurance being basically insurance plans for insurance companies, bought from other, specialized insurance companies—as sufficient reinsurance coverage could help the FAIR Plan, and other insurers operating in these areas, weather the storm without being forced to raise prices excessively. But those companies, too, might then raise their reinsurance rates substantially, and those increases would then ripple across this same economic landscape.

Lots of potential long-term financial damage, either way, on top of the assets lost and damage caused directly, and of course, the human losses, which as of the day I’m recording this, totals 24 people confirmed killed, dozens of people missing, and a still unquantified number of injuries and lives completely, perhaps permanently disrupted or upended.

This whole situation—these fires—are complicated by many factors.

The climate is one, as 2024 was the hottest year on record, the first one we’ve experienced, as a species, above that now-famous 1.5 degrees celsius-beyond-pre-industrial-levels milestone. That figure will fluctuate day to day and even year to year due to all sorts of variables, but the big picture here is that the global water cycle has changed because global average temperatures have been nudged upward, and that’s causing a lot of upsets to local infrastructure and ecosystems that have always, since we’ve been here, at least, relied on that cycle functioning in a certain way, within a certain spectrum of operation.

Now that we’ve defied that spectrum, we’re finding ourselves with more extreme disasters of all kinds, but also more extreme and dangerous and damaging and deadly repercussions from those disasters, because the things we did to ameliorate them previously no longer work the same way, either.

So California, especially this part of California, has been even drier than usual, and the way the state used to prevent the spread of wildfires no longer works the way it used to work; a climactic issue compounded by issues with the systems we’ve clung to, despite the problems they’re meant to address having evolved substantially since they were originally developed and deployed.

This situation is also complicated by the fact that southern California, and especially the LA area, is a hotbed for global entertainment, and that means a lot of wealth concentration.

Lots of people scrambling to buy and build homes with beautiful coastal views, and the fact that these areas are high-risk for wildfires and increasingly other disasters, as well, doesn’t really matter, because rich people want to be in this area, around all this activity and wealth, and it’s generally understood that wealth can make you immune to these sorts of things, at least most of the time.

That immunity is no longer such a given, and that high concentration of expensive assets means that even a relatively small fire can cause a heck of a lot of damage in a relatively short time.

The same general collection of properties also means this region has a lot of landmarks that are at high-risk of destruction, and which are increasingly expensive to maintain and protect and repair, and it means the world is watching, to a certain degree—as celebrities flee their homes and influencers report the beat-by-beat of their evacuations—which in turn means there’s plenty of incentive to spread misinformation, either out of a desire to participate in the situation, or because of honest ignorance, or for political and ideological reasons: wanting to paint the local governance as incompetent, for instance.

At the moment, folks in the area are suffering from periodic power outages, largely due to local utilities shutting down some of their service areas in order to avoid starting new fires, their power cables and high winds sometimes sparking such things even in less pressure-cooker-like moments. And the air quality is absolutely abysmal, leading to localized health issues.

Some areas have run out of water, apparently due to issues with reservoir infrastructure, and one of the two firefighting planes the local authorities have been using to douse the fires when the wind conditions allow has been grounded for repairs, after colliding with an illegally flown drone, the operator of which was apparently a paparazzi trying to capture photos of celebrity homes, either being consumed by fire or somehow avoiding such a fate.

Again, this is a fast-moving story, and a lot is changing day by day, but at the moment it’s looking like this could become the most expensive natural disaster in US history, and while local authorities are making progress in halting these fires’ spread, the damage that’s been done has already been substantial, and could have a lot of knock-on effects, for individuals and for the state’s and country’s economy, for years to come.

Show Notes

https://en.wikipedia.org/wiki/Park_Fire

https://en.wikipedia.org/wiki/Smokehouse_Creek_Fire

https://www.washingtonpost.com/business/2025/01/09/los-angeles-wildfire-economic-losses/

https://en.wikipedia.org/wiki/California_FAIR_Plan

https://www.nytimes.com/2025/01/08/climate/california-homeowners-insurance-fires.html

https://www.sfchronicle.com/california-wildfires/article/fair-plan-insurance-losses-20025263.php

https://www.nytimes.com/interactive/2025/01/08/weather/los-angeles-fire-maps-california.html

https://www.wsj.com/finance/wildfire-insurance-homeowners-costs-3889531f

https://www.newyorker.com/news/the-lede/the-insurance-crisis-that-will-follow-the-california-fires

https://archive.ph/Inso5

https://www.npr.org/2025/01/09/nx-s1-5252837/will-there-be-enough-money-to-pay-out-insurance-claims-from-the-la-wildfires

https://www.washingtonpost.com/climate-environment/2025/01/09/california-wildfire-palisades-homeowners-insurance/

https://arstechnica.com/health/2025/01/public-health-emergency-declared-amid-las-devastating-wildfires/

https://apnews.com/article/los-angeles-wildfires-southern-california-c5826e0ab8db965cb2814132ff54ee6f

https://apnews.com/video/fires-wildfires-los-angeles-los-angeles-area-wildfires-california-574351467d2142ad958c212a0413ad96

https://www.reuters.com/world/us/san-fernando-valley-under-threat-los-angeles-fire-rages-2025-01-12/

https://www.wsj.com/us-news/los-angeles-wildfires-social-media-rumors-44d224b4

https://www.wsj.com/style/los-angeles-hollywood-fires-celebrities-homes-paris-hilton-d1e3a7de

https://www.vulture.com/article/hollywood-paparazzi-los-angeles-fire.html

https://www.theguardian.com/us-news/live/2025/jan/12/california-fires-death-toll-expected-rise-ucla-threatened-winds-latest-updates

https://www.reuters.com/business/environment/2024-was-first-year-above-15c-global-warming-scientists-say-2025-01-10/

https://www.nytimes.com/2025/01/09/us/los-angeles-fire-water-hydrant-failure.html?unlocked_article_code=1.oE4.OUQs.lcdCoSSeQBtL

https://www.axios.com/2025/01/11/los-angeles-fire-insurance-losses-billions

https://www.latimes.com/california/story/2025-01-08/palisades-fire-devastation-scope

https://www.washingtonpost.com/weather/2025/01/11/los-angeles-fires-california-updates-palisades-eaton-kenneth/

https://www.latimes.com/california/story/2025-01-09/drone-collides-with-firefighting-aircraft-over-palisades-fire-faa-says

https://www.nytimes.com/2025/01/11/us/los-angeles-calfire-firefighters.html

https://www.axios.com/2025/01/12/la-fires-climate-change-drought-extreme-weather

https://www.axios.com/2025/01/12/california-wildfires-loss-mental-health

https://www.nytimes.com/live/2025/01/12/us/los-angeles-fires-california

https://www.nytimes.com/2025/01/12/us/trump-los-angeles-fire-newsom-bass.html

https://en.wikipedia.org/wiki/Hurricane_Katrina

https://en.wikipedia.org/wiki/2008_Sichuan_earthquake

https://en.wikipedia.org/wiki/2023_Turkey%E2%80%93Syria_earthquakes

https://en.wikipedia.org/wiki/Great_Hanshin_earthquake

https://en.wikipedia.org/wiki/2011_T%C5%8Dhoku_earthquake_and_tsunami

https://en.wikipedia.org/wiki/List_of_disasters_by_cost

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