EQECAT estimates Sandy insured loss $5B-$10B comments on cat bonds

Risk modelling firm EQECAT kindly gave us some thoughts on hurricane Sandy and how they see the potential for impact to catastrophe bonds. Tom Larsen, SVP and Product Architect, sent us some exclusive insight on Sandy which we include below. EQECAT have given an early estimate of $10 billion to $20 billion in economic losses from Sandy which they believe translates into $5 billion to $10 billion insurance industry loss.

This is a very early estimate from EQECAT and it is extremely difficult for anyone to forecast the impact Sandy could have further inland as it interacts with colder air coming from the west. EQECAT have kindly given is a special analysis on hurricane Sandy including details on the storm and the potential for losses to the cat bond market.

The insight from Tom Larsen of EQECAT follows below.

The storm

• Max. winds at 90 mph (sustained). Modest category 1
• Breadth – the forecast 70%-ile confidence bounds of 50 kt sustained (60 mph) cover almost 250 miles of coast, from the Maryland shore to New York City
• Penetration – the same forecast shows 50 kt winds extending to Harrisburg, PA
• Persistence – A weather system from the north is expected to slow Sandy down shortly after landfall, keeping storm winds on the coast for longer than a typical hurricane or transitioning storm
• Rainfall and storm surge will be large exacerbating factors for this storm, with storm totals of 10 inches (25 cm) forecast for some areas along the track. A full moon is producing large tidal fluctuations which are exacerbating the surge effects at the coast.

The region

Population affected by the storm approaching 50 million, with a large concentration along the coast

Analysis

Based upon observations of past hurricanes, the maximum winds from hurricane Sandy are expected to produce isolated pockets of torn rooftops and windows broken from debris. Category 1 storms do not typically produce large catastrophes, but the geographic breadth of high winds from Sandy both laterally along the coast and penetrating inland produces an affected area many times larger than a typical category 1 storm.

Economic damages from this event are likely to reach $10 to $20 Billion. In comparison, Hurricane Irene (2011) caused an estimated $10 Billion of economic damages, and Hurricane Ike (2008, Houston) striking the 4th largest city in the US caused an approximate $20 – $30 Billion in economic damages. Hurricane Irene produced higher winds when it traversed South Carolina, but was below hurricane strength when it traversed New York City, and flooding in New Jersey, New York extending northwards to Vermont caused widespread disruption. Hurricane Ike had much higher winds and its very wide span caused significant damages along the Gulf Coast.

Economic damages include property damage from wind, rain and flood. They also include intangibles such as business interruption and additional living expenses, damage to infrastructure utilities include roads, water and power, and municipal buildings which may or may not be insured. Economic damages are by their very nature very approximate.

Housing and general commercial occupancies are expected to comprise most of the damage. Newer commercial and industrial occupancies are expected to benefit from improvements to building codes and receive less damage, although chaotic winds could produce pockets of higher damage. Flooding is expected to cause widespread incidents of localized flooding, and storm surge along the coast has already produced reports of flooded streets in some areas, all consistent with EQECAT’s economic damage estimate.

Estimating the losses to reinsurers from this event includes significant uncertainty for many reasons.

• Damages to insured properties will endure over several days, beginning now and extending into Wednesday as Sandy slows and persists over southern central Pennsylvania. Observations of past events lead to the expectation of a widespread incidence of relatively low levels of damage. The damage (and ensuing insured losses) are likely to be distributed over a broad set of insurance companies, generally by market share. The relationship of losses to retention levels will vary from company to company, especially between the national carriers and the regional carriers.
• Recent events have demonstrated that approximately half of the economic damages are covered by private insurance companies, with the remainder covered by NFIP or uninsured and borne by the property owners. Every event is unique, and Sandy has many unique aspects.

A very rough translation from economic damages to insured losses produces a very approximate industry loss range of $5 to $10 Billion dollars. At this point in time, the losses could easily be above or below these bounds, but these bounds represent where it is most likely to center around. This loss ranges from approximately an equivalent to Irene (last year) to Ike (2008). Catastrophe bonds in the northeast are often structured with industry losses as a trigger, and we can compare the estimated levels from this year to what EQECAT estimates for a re-creation of the 1938 storm ($20 to $30 B insured), Carol (1954, $8 to $15 B insured), Hazel (1954, $20 – $35 B insured), Gloria (1985, $7 – $10 B insured), Bob (1991, $3 – $5 B insured) and Floyd (1999, $3 to $5 B insured). An industry loss at the higher end of the range could possibly trigger some bonds.

Complicating this, however, is the complex structure of some of the bonds which are weighted by counties – the area that is being impacted by Sandy is not one that is deemed to be high-risk hurricane areas and this aspect could result in either a very strong or weak impact upon bond trigger calculations. Without reviewing each catastrophe bond in detail it is very difficult to estimate the likelihood of default. And the number of bonds potentially affected should include both the rated bonds and private deals which are less publicized.

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Also our latest insight on Sandy can be found in this article.