AIR Worldwide estimates Sandy insured loss at between $7B and $15B

by Artemis on October 30, 2012

We have another estimate of the insured losses caused by hurricane Sandy from risk modeller AIR Worldwide and it’s higher than previous estimates which were largely pre-landfall. After analysing the impact of Sandy and with the additional insight gleaned from damage reports received so far, AIR Worldwide estimates that insured losses from Sandy to onshore properties in the U.S. will be between $7 billion and $15 billion.

That’s a reasonable increase from the $5 billion to $10 billion insured loss that was discussed yesterday after EQECAT released a pre-landfall estimate. There’s a chance that the next update from EQECAT could see their estimate rise given the better view of the post-landfall situation they will now have.

“At landfall, the storm had a central pressure reading of 946 mb and estimated sustained winds of 80 mph,” commented Dr. Tim Doggett, principal scientist at AIR Worldwide. “Actual wind recordings included gust wind speeds of 90 mph in Islip, NY and Tomkinsville, NJ. Other readings included an 84 mph gust at Plum Island, NY, 83 mph in Cuttyhunk, MA, and 76 mph in Groton, CT.”

Here’s AIR’s assessment of Sandy just before landfall:

Sandy’s central pressure reached a low of 940 mb—a pressure reading that would usually be associated with more powerful hurricanes—but it remained a Category 1 storm. This was due to Sandy’s enormous size; tropical storm-force winds reached nearly 950 miles across, and hurricane-force winds extended 175 miles. This allowed for a more gradual wind speed gradient between the eye and the outer bands, which mitigated the wind speed. Sandy’s diameter made it the largest Atlantic hurricane on record in terms of the span of tropical storm-force winds. The storm affected areas as far north as Toronto and west to the Great Lakes. Chicago reported wind gusts up to 60 mph and waves in Lake Michigan exceeded 24 feet.

Dr. Doggett continued, “Sandy’s diameter was nearly twice the size of other massive hurricanes including Katrina (2005) whose diameter was 435 miles, Isabel (2003) whose diameter was 575 miles, and Isaac (2012) whose diameter was 450 miles. The huge radius helped to keep the winds at Category 1 intensity, and allowed the storm to interact with the an approaching disturbance in the jet stream that resulted in severe weather across a wide swath of the eastern United States, including blizzard conditions in the higher elevations of the Appalachians.”

AIR’s loss estimates reflect:

  • Insured physical damage to property (residential, commercial, industrial, auto), both structures and their contents;
  • Additional living expenses (ALE) for residential claims;
  • For residential lines, estimates reflect AIR’s view that insurers will ultimately pay 10% of modeled storm surge damage as wind losses;
  • For commercial lines, insured physical damage to structures and contents, and business interruption directly caused by storm surge, assuming a 10% take-up rate for commercial flood policies (Note: Other flood losses are not modeled or reflected in 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;
  • Demand surge.

Loss estimates do not reflect:

  • Losses paid out by the National Flood Insurance Program;
  • Losses resulting from the compromise of existing defenses (e.g., natural and man-made levees);
  • Losses from the flooding of tunnels and subways;
  • Losses to uninsured properties;
  • Losses to infrastructure;
  • Low-level losses in states distant to the storm’s center that have resulted from the interaction between Sandy and another frontal system to the west;
  • Losses from extra-contractual obligations;
  • Losses from hazardous waste cleanup, vandalism or civil commotion whether directly or indirectly caused by the event;
  • Other non-modeled losses;
  • Losses for U.S. offshore assets and non-U.S. property.

The increase in insured loss estimate is important to note. The higher the industry loss from this event the more chance there is of cat bond exposure becoming a factor, industry-loss warranties (ILW’s) becoming exposed and of course more losses will be passed on to reinsurers and retrocession providers. It’s still early days with Sandy and firming up a loss estimate is going to take a while, but the upwards movement in estimates does suggest that a meaningful loss is developing for the re/insurance sector.

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