Risk Analysis vs. Cheap Labor

As part of any risk management strategy, organizations look to avoid those areas prone to work-stopping, and possibly property damaging, weather events and disasters. As efforts to return manufacturing to the U.S. get stronger, it helps to see which states are the most prone to disaster.

To that end, both Kiplinger and Bankrate have recently issued studies looking at those parts of the U.S. most prone to natural disasters. The Kiplinger study, working with Verisk Analytics, pored over insurance records from the past 10 years to find which states had the highest reported property losses. The list is:

• Louisiana          $32.4 billion
• Florida               $31.6 billion
• Texas                $26.7 billion
• Mississippi         $14.9 billion
• New York           $13.3 billion
• New Jersey        $ 8.9 billion
• Alabama            $ 8.1 billion
• Tennessee        $ 7.7 billion
• Oklahoma          $ 7.3 billion
•  Missouri            $ 7.3 billion

Bankrate’s study, on the other hand, analyzed the number of disasters that had affected each state in the past 60 years to compile its list. Not surprisingly, a lot of the same names appear.

• Texas                   86
• California             78
• Oklahoma            73
• New York             67
• Florida                  65
• Louisiana              60
• Alabama               57
• Kentucky               56
• Arkansas              54
• Missouri                53

Given that gulf states make up the top four of the Kiplinger study, and five total, illustrate the sheer cost of dealing with hurricanes. This point is driven home by the inclusion of New York and New Jersey in the five and six spots, simply because Hurricanes Irene and Sandy were the seventh- and second-most costly hurricanes in U.S. history, respectively. The states on the list that aren’t affected by hurricanes earned their spots due to tornado activity.

An interesting note here, one that speaks to the balance needed in factoring in risk to a business decision, is that many of these disaster-prone states are industry hubs. Outside of New York and New Jersey, those states in the Kiplinger study have some of the lowest costs of living in the U.S., meaning low wages. Alabama alone houses final assembly plants for three major automakers, not to mention the ship and airplane construction facilities in some of the other states. On top of that, eight of the top 10 busiest ports, in terms of total tonnage, are in these disaster-prone areas.

Every state is trying their best to appeal to major industries as production slowly creeps back into the U.S., and the states with the cheapest labor and lowest taxes usually win out (see: Alabama, Tennessee, etc.). If the uptick in violent weather continues at the pace it has had over the past five years, it will be interesting to see when the risk scale finally “tips” away from these cheap labor locations.