Workplace Issues

Insurers Equipped to Pay $10 Billion in Hurricane Sandy Losses

Because of a strong year financially, the insurance industry should be able to pay the claims of insured businesses without too much pain.
Caroline McDonaldOctober 30, 2012

Preliminary estimates of losses from Hurricane Sandy are up to $10 billion, likely making it a much more damaging event than Hurricane Irene, which had early estimated losses of $5 billion. But because the property-casualty insurance industry has enjoyed a good year financially up until now, it’s in a good position to pay off the claims insured corporations may make in the wake of the storm, says one insurance-industry expert.

“This is by no means a repeat of Katrina, or nowhere near the most severe event insurers have ever seen in terms of hurricanes,” says Robert Hartwig, president and economist of the Insurance Information Institute in New York. “It’s a manageable event. Year-to-date prior to Sandy, catastrophe losses were running 40%–50% below where they were in 2011.”

Insurers are in a strong position, he says, adding, “Even with this loss, it’s likely that catastrophe losses in 2012 will be below where they were in 2011.”

“The industry came into last October in a very strong financial position,” Hartwig explains. “These are precisely the types of events that insurers assume will occur and the types of events for which they plan. So the industry is ready and prepared for any eventuality in terms of costs or claims.”

Still, the damage to companies in the region could be substantial. EQECAT, a risk-modeling company, set its initial damage estimate for the event at $10 billion. As of today, however, losses could easily be above or below this number, EQECAT says.

Tom Larsen, senior vice president and product architect at EQECAT, says most of the insured wind-damage loss occurred in Pennsylvania, with New Jersey in second place. “New York has a large amount of wind damage and loss, although the exact amount remains to be seen. Flooding in New York City will need to be adjusted for, because of its unusual nature,” he says, adding that Atlantic City “has flooded four times in 50 years, so there is some, albeit small, precedent.”

The National Hurricane Center reports that about 50 million people are expected to be affected by the storm, with a large concentration along coastal areas. Significant damage is expected in New Jersey, New York, Delaware, Virginia, and Pennsylvania.

According to Risk Management Solutions, another firm that does catastrophe modeling:

• The majority of the U.S. East Coast has been affected with strong winds from Hurricane Sandy.

• In New York City alone, there is $2.1 trillion worth of insured property, mainly comprising commercial and industrial buildings.

• Sandy made landfall very close to high tide along the Eastern seaboard, resulting in record-breaking storm surges in some areas of New Jersey and New York.

• Heavy rainfall hit the region, with Wildwood, New Jersey, recording almost 12 inches in 24 hours. Reports of flooding occurred from Virginia to Massachusetts.

• Transportation has been severely affected, with more than 15,000 flights canceled since Sunday. The New York subway system is flooded and could remain closed for as many as four days.

• As of Tuesday, 7 million people were without power across 15 states and Washington, D.C., and 16 people have died as a result of the hurricane.

• A state of emergency has been declared in nine states, and a “major disaster” has been declared for New York City.

• The effects are far-reaching because of the size of the storm. A great deal of building and auto damage stemming from fallen trees is expected to have occurred. Business interruption, damage following fire, coastal surge damage, and inland flooding will all contribute to the total losses to businesses. Inland damage more typical of winter storms is expected, including, for example, roof damage otherwise caused by snow loading.

• It is too early to estimate losses, but to provide a benchmark, Irene affected a similar region last year and caused about $4.5 billion in insured losses. The Sandy event, however, is much more severe and has had a much worse impact on New York City than Irene did.