The widespread flooding caused by Hurricane Sandy will represent a significant component of catastrophe damages, although loss estimates remain highly uncertain, and could take years to finalize, says Fitch Ratings.
The rating agency reports that catastrophe modeler EQECAT, Inc. recently estimated insured industry losses from Sandy in the US$10 billion-US$20 billion range, with economic damages of US$30 billion-US$50 billion. And, AIR Worldwide estimates insured industry loss to onshore U.S. property exposures of nearly US$10 billion, with a likely uncertainty interval of US$7 billion-US$15 billion. “The ultimate level of insured losses remains highly uncertain,” Fitch concludes.
Nevertheless, Fitch says that it expects that the reinsurance industry will be able to absorb this level of losses given its solid capital position. At the high end of the range, a US$20 billion loss represents a manageable 4% of U.S. industry capital, it says. And, Fitch anticipates that primary insurers will bear a greater share of losses at the low end of the range.
“Part of the uncertainty in estimating what will be the ultimate insured loss from this event relates to the complexity of assessing insurance losses from such a large, intense storm over a widespread region, particularly with respect to the sizable flooding. These factors include determining whether a loss is caused by wind or flood, the level of take-up rates for commercial flood policies, and uncertainty in the application of hurricane deductibles,” it says.
Homeowners’ insurance policies cover wind losses, but generally do not provide coverage for flood damage. And, Fitch highlights that the question of wind versus flood as the cause of loss has been very contentious in the past, most notably generating numerous lawsuits in the wake of Hurricane Katrina in 2005.
“While the industry has likely improved its ability to manage this risk since that time, the industry remains prone to litigation, and thus it could still take several years before a final insured loss total from Sandy is known,” it says.
Many commercial policies cover both wind and flood losses, although insurers often require a separate commercial flood policy and put in place a flood sublimit, it says, adding that estimating the amount of commercial flood insurance exposure from Sandy is challenging.
Another potential uncertainty in developing insured loss estimates is that Sandy made landfall as a post-tropical cyclone, just below official hurricane status. “As such, it is expected that the use of a hurricane deductible will vary by insurance company and by state,” it says, noting that hurricane deductibles are usually higher than the normal wind deductible.