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Although Toll Rises, Sandy’s “Manageable” for Insurers

Even though superstorm Sandy loss estimates have risen to $10 billion-$20 billion, insurers will be able to pay for covered claims, an insurance-in...
Caroline McDonaldNovember 2, 2012

Even though Eqecat, a widely cited risk-modeling company, yesterday doubled its postlandfall insured loss estimates for superstorm Sandy from $5 billion–$10 billion to $10 billion–$20 billion, those losses can be handled by the insurance industry, according to an insurance-industry expert.

Factors for revisions include electric and utility losses, subway and tunnel outages, and continued “unknowns,” according to Eqecat, which estimates that the total economic damage wreaked by the storm will hit $30 billion–$50 billion.

In a conference call late yesterday, Tom Larson, an Eqecat senior vice president, explained that losses of power contribute to the higher estimates. Of the losses, 34% will be in New York, 30% in New Jersey, and 20% in Pennsylvania. Other states make up the remaining 16%, he said, adding that the storm has affected almost 15% of the U.S. population.

Robert P. Hartwig, an economist and president of Insurance Information Institute, observes that even with doubled loss projections, insurers are equipped to handle the loss payments. “Insurers are financially prepared, very well capitalized, and so this is a manageable event from an industry perspective,” he says. “Even at the high end of Eqecat’s estimates, the losses remain well below the $47 billion that Hurricane Katrina cost insurers.”

Hartwig explains that losses sustained by primary insurers will be redistributed to reinsurers globally, including reinsurance companies in Bermuda, Germany, and the United Kingdom. In 2011, globally speaking, the property-casualty insurance industry “had about $108 billion in insured losses,” he says, noting that “those weren’t all borne internally in the country in which they occurred: they were shared globally via reinsurance.”

Even if the loss numbers for Sandy do go higher, there will be a greater participation by reinsurers, he adds.

For its part, AIR Worldwide, another catastrophe-modeling firm, estimates that insured losses from Sandy to onshore properties in the United States will be between $7 billion and $15 billion. AIR’s estimates include wind and storm-surge damage to onshore residential, commercial, and industrial properties and their contents, as well as automobile and time-element claims, which include additional living expenses for residential properties and business interruption for commercial properties.

RMS, a third risk-research firm, has yet to make loss estimates, observing that Sandy has caused the most power outages of any hurricane in history. At its peak, the storm affected nearly 8.5 million homes and businesses across 15 states — and many are still without power.

Further, thousands of people remain under mandatory evacuation and ongoing flooding is affecting many homes and businesses, especially in southern Manhattan and along the west side of the Hudson River in New Jersey. “It is evident that Sandy’s impacts are widespread and multiple with mounting super-cat-like elements,” Claire Souch, vice president for model solutions at RMS, said in a statement, referring to catastrophes causing the biggest swaths of damage. “The event is still live, and several variables are yet to play out. Consequently, it remains too early to provide a reliable estimate of the total insured losses.”

The speed of restoration of power and pumping out of flood waters from towns and transport systems remain major unknowns, she said, and “our experience shows that these key variables will play a significant part in the ultimate loss.”

AIR estimates there is $2.1 trillion worth of insured property in New York City alone resulting from Sandy. Its loss estimate reflects:

  • Insured physical damage to property (residential, commercial, industrial, auto), including both structures and their contents.
  • Property covered by commercial insurance lines, including insured physical damage to structures and contents, and business interruption directly caused by storm surge, assuming that 10% of New York City businesses bought commercial flood-insurance policies (other flood losses are not modeled or reflected in the estimates). Business-interruption losses include direct and indirect losses for insured risks that experience physical loss.
  • For the automobile line, estimates reflect AIR’s view that insurers will pay 100% of storm-surge damage.

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