Why Sandy could be good for the Insurance industry


There is no doubt that Superstorm Sandy has wreaked damage across both the Caribbean and the east coast of the United States of America. To the layman claims of $15-20bn sounds like a financial disaster for the Insurance industry. However the financial consequences of Sandy may be positive for the London Market and the Commercial Insurance sector in the long term.

It’s a financial world (iafw)  talked to Christopher Ling (CL), Commercial Insurance expert and Head of Insurance for BearingPoint in the UK to understand more about why Sandy could have long term benefits for the industry as well as the short term causes. We started by asking him about the size of the loss.

CL: In terms of financial loss this is a medium severity Catastrophe Loss. This makes it large enough for the market to think about buying more reinsurances in the near future without the reinsurers being impacted by a major loss. Rates and hence margins will rise. Sandy should act as a stimulus in encouraging US primary property insurers (more attractive than US liability business) to go out an place orders for more reinsurance business in the London Market. This will lead to an influx of  new risk capital and players creating demand for consultancy services, with the consequential increase in fee income.
People will always need Insurance and losses like this, as sad and as dreadful as they are, serve to remind clients and customers of this.
iafw: So who pays for Sandy and how much?
CL: Catastrophe Modelling Agencies have been busy. Economic total loss estimates have been put at  $30bn-$55bn with some $15bn-$20bn needed to fund estimated insurable indemnity losses.
The consensus is primary US general insurers are likely to bear the brunt of the thousands of small to medium flood, wet damage, denial of access and loss of profits claims. The net written premium of Lloyds of London is currently some £24.8bn ($40.0bn). Whereas economic total loss estimates have been put at  $30bn-$55bn with some $15bn-$20bn needed to fund estimated insurable indemnity losses. US Insurable Cat loss estimates tend to exclude claims under the National Flood Insurance Program as well as the significant parts of the Infrastructure and municipal clear-up costs that are likely  arise. The Queens’ fires could hit Cat treaties, but the biggest unknown is the extent of the Loss of Profits indemnity, which is being driven by clear-up resources and prolonged power outages. It will probably be a couple of months before a level of confidence in the final estimate emerges.
The New York Metro could possibly be led by a major underwriter and reinsured around the market. The Power Plants written on Specialty Risks Energy policies, and there will be some Catastrophe Claims – but generally it is likely that many Reinsurers will have been lucky.

iafw: Whilst there wasn’t snow in Manhattan a lot of snow fell elsewhere on the eastern seaboard, Why is it important when the snow melts?

CL: The combination of the two air masses led to intense snowfalls in the Eastern USA. As it is still October, it is likely that as well as disruption, the snow will melt rapidly in the next few days. Depending when it melts will impact the future loss severity. If it melts in 2 weeks’ time,  the tides will be on  Springs again, then it is likely that narrower reaches in urban areas will experience significant localised flooding, which will also impact  lower lying areas of New York.    If it melts in 1 or 3  weeks’ time on  Neaps tides that are not so high, then flooding will be markedly less.
iafw: We’ve seen a lot of natural disasters over the last few years, how have the  Reinsurance Catastrophe Market been?
CL: The Windstorm Catastrophe Reinsurance market losses in recent years have been benign. The market has broadly been profitable since 2005 (Hurricane Katrina and total Catastrophe Losses estimated at US Insurable losses tend to exclude claims under the National Flood Insurance Program as well as the significant parts of the Infrastructure and municipal clear-up costs that are likely  arise. $118bn).  Even through the Japanese Tsunami, Thai floods and New Zealand earthquakes, the market by and large  managed to fund losses out of cashflow rather than its capital base. The 2011 underwriting year was in fact the second largest Catastrophe loss year on record (to 2005) but the strength of the market and its modelling capabilities has resulted in depressed margins rather than recapitalisation calls.
After the losses of 9/11 (2001), which were comparable in real terms to Hurricane Andrew (1992) a whole new set of investors entered the reinsurance and specialty market as rates rose by 30%  over the subsequent 2 years. This was  the “Class of 2002” – several  major Lloyds capital vehicles created to fund and underwrite Catastrophe and Specialty loss business at these increased rates without the baggage and funding commitments of previous Lloyds involvements and losses.
Since 2002, these capital vehicles have generally made very good returns against their A or A+ paper and the reinsurance market has tended to remain profitable, whilst the primary general insurance market is just coming out of the bottom of a prolonged market cycle dip. However, as with the rest of the economy, there has been nothing to stimulate extra demand for insurance – until 4 days ago.

iafw: This was the first time that we have seen Manhattan hit by such bad weather. Why did this particular storm have such a big effect? 

CL: It must be appreciated that losses of this type are dreadful to the average man in the street or to businesses and some deaths have occurred. However, although winds only gusted at 70-90mph, New York was devastated by a much higher tidal “Storm Surge” of 13’11”  (as opposed to the originally anticipated 11”) caused by wind and negative barometric inversion. The offshore islands acted as limited breakwaters and devastation is likely to be higher here.  Importantly, direct wind-damage losses were not as significant as originally envisaged.
This surge led to severe flooding in Lower Manhattan (much of which is below High Water Springs sea-level) and significant flooding on the Lower East-side from Brooklyn to Queens. Over 375,000 people were evacuated and 650,000 households in the NY  were left without power, including all properties below 42nd Street. Furthermore, a power plant exploded in Queens and there was a major fire burning over a 100 properties. Luckily the New Jersey side of New York harbour has managed to escape the brunt of the flooding due to not being in the path of the travelling flood waters.
Outside of New York,  Atlantic City, Ocean City and parts of Baltimore, Maryland etc. were also  severely hit by flooding and Storm Surges. It should be noted that Levee and flood defence building in the US has not taken priority for many years.
iafw: We’ve heard a lot about ‘Storm Surges’ and ‘Negative Barometric Inversion’ during the coverage of this story as being the loss causes – What are they?  
CL: Sea water piled up into Eastern Seaboard  Estuaries leading to flooding caused by a number of combining  factors;-
·         An intense and highly unstable, humid, anti-clockwise rotating, air-mass; colliding with a cold stable clockwise rotating northerly air mass; led  to extremely rapid condensation (torrential rain),  and the air mass being accelerated in a North Westerly direction to at speeds of 23-28mph (and hence waves) straight up the Eastern Seaboard rivers.

·         Extreme low pressure – sub 940Mb literally “sucked” water-levels up, which were already at a peak due to equinoctial  Spring tides. The average global barometric pressure is 1013.2 Mb. A reduction of 1 Mb results in an INCREASE of just under 1cm in sea-level.

The” bath-tub effect” of water surging  up the Eastern Seaboard  Estuaries caused levels to rise even further when reaching geographic constrictions, such as the Long Island Sound, leading to even higher water levels

iafw: Sandy is undoubtedly a human tragedy which will continue to have a devestating impact on people, particularly as the weather gets colder. As was seen after Katrina, it sometimes takes a disaster of this scale to get the investment in infrastructure that could have prevented the worst effects of the storm to be made. For many years it has been obvious that Manhattan was vulnerable to water levels rising and that the equivalent of the Thames Barrier was needed to prevent this. Irrespective of which candidate is elected as President hopefully the lessons will be learnt from Sandy and the necessary investments in infrastructure on the eastern seaboard will be made which will be good for the economy, good for the residents and will be good for the commercial insurance industry. 

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