The aftermath of natural disasters is catastrophic. Left behind are scarred landscapes, scraps of homes and businesses, and impoverished communities. How do people recover from unexpected destruction?
Benjamin Collier, assistant professor for the Fox Department of Risk, Insurance and Healthcare Management analyzed recovery from a natural disaster. He focused on small and medium-sized businesses after Hurricane Sandy, a Category 3 storm that hit the Caribbean and Northeastern coast of the U.S. in 2012. Collier relays that his prior experience is what drew him to the topic of recovery after Hurricane Sandy.
“I was working in Peru, in grad school, on how flood incidents affect access to credit for small and medium-sized farmers,” Collier says. “There really hasn’t been a lot of work on how disasters affect small businesses in general.”
While most research is dedicated to how larger corporations prepare and recover after natural disasters, Collier wanted to discover the economic impact for small-scale businesses in financially developed settings like New York or New Jersey.
Collier partnered with colleagues at the Federal Reserve Bank of New York and the Wharton School to conduct surveys about the small businesses surrounding the East Coast area. They discovered many details about these firms’ credit. The largest difference is whether or not the business had insurance.
“Some of them had insurance, but many didn’t have any or didn’t have enough. As a result, loans were an important part of financial recovery,” Collier explains. “We also saw many owners who ended up putting more personal resources into their business. For many small business owners and entrepreneurs, this is their life.”
One tool for businesses’ recovery after disasters is the U.S. Small Business Administration’s (SBA) Disaster Lending Program. However, Collier realized through the surveys that very few applied to the program, so the amount of money lent to businesses by the SBA appeared very small. Even so, the biggest issue still was which businesses did or didn’t buy insurance prior to Hurricane Sandy.
“What surprised me most was how large the insurance gap was between businesses. We think about insurance as the front line financial tool to manage big disasters. You have these new businesses who might have good ideas, but they fail because of this disaster and that’s an unfortunate outcome,” Collier says.
Collier’s research, “Firms’ Management of Infrequent Shocks,” was published in the Journal of Money, Credit, and Banking in December.
Collier’s research doesn’t end with Hurricane Sandy; he is currently investigating the recovery from 2017’s Hurricane Harvey destruction in the Southern U.S. “We conducted a survey one year after Harvey on businesses in the Houston area,” explains Collier.
“A big shock like this calls a lot of things into question. If a firm needs to borrow tens or hundreds of thousands of dollars to recover, this can up-end its business models,” says Collier. “More broadly, many communities rely on these businesses. So, if local businesses are having a hard time recovering this leads to questions on how the community will recover.”