AIR increases hurricane Sandy insured loss estimate by over 70%

by Artemis on November 26, 2012

Risk modeller AIR Worldwide has published an update to their estimate of insured losses resulting from hurricane Sandy today and the numbers have jumped considerably. AIR’s first estimate was published on the 30th October and in that update they gave a range of $7 billion to $15 billion of losses but said they expected it to rise. In today’s update AIR have given a tighter, but much higher estimated range of between $16 billion and $22 billion of losses to the insurance industry from Sandy.

That’s a pretty significant jump, with the low-end estimate increasing by 128% from $7B-$16B, the mid-point estimate increasing by 72% from $11B-$19B and the high-end estimate increasing by 46% from $15B to $22B. AIR puts the increase down to the following:

The significant increase in estimated losses from AIR’s estimate issued on October 30, the day after Sandy’s landfall, is driven primarily by an increase in estimated losses from storm surge damage. This, in turn, is driven by a reassessment of the percentage of flood losses that will actually be paid, as well as an improved storm surge footprint run against high-resolution industry exposure information.

A number of other factors have driven the increase in AIR’s insured loss estimate:

  • New data: the latest information on surge height and extent from the USGS, surface wind speed observation data, and findings from AIR’s post-disaster survey teams.
  • Commercial flood insurance penetration: AIR originally thought this to be around 10% but on the basis of discussions with clients and analysis of client data, AIR now believes that a revised assumption of 20% is more applicable for this particular storm and region. AIR notes that there is still uncertainty in this assumption.
  • Deductibles: In AIR’s initial loss estimates for Sandy, hurricane deductibles were applied. In the revised estimates, residential losses assume a flat $750 deductible.

AIR also notes that there are a number of unmodelled losses which aren’t included in the revised estimate of $16 billion to $22 billion and these include infrastructure damage, such as the Mass Transit Authority, highways and tunnels and marine craft or boat damages. AIR has also not included losses in other States on the periphery of the main area damaged by Sandy.

AIR estimate that the inclusion of losses from peripheral regions could add another $500m to $1 billion to the total. Infrastructure damages are likely to be mostly picked up by government rather than insurers, although some could trickle into the insurance market. Boat damages have been said to be at least $650m which makes it the worst single boat insurance loss event on record.

AIR said that if all of these unmodelled insured losses are factored in as well as the continuing uncertainty due to commercial flood insurance we could see the insurance industry loss from Sandy reach a level higher than their estimates.

The divergence between loss estimates is a sure sign of the continuing uncertainty around the final insured loss total from Sandy and the difficult job insurers and adjusters are having tallying claims. We also need to remember to factor in business interruption, contingent business interruption and demand surge.

Here’s a reminder of the other main insured estimates as they stand currently:

EQECAT at $10 billion to $20 billion

RMS at $20 billion to $25 billion

PCS initial estimate at $11 billion

Quite where the final loss total from Sandy will end up is difficult to forecast but if the risk modellers are to be believed $20 billion is beginning to look like a good reasonable guess. How much of the insured loss hits reinsurers depends on how high the estimate goes. We’ll keep you posted as updated estimates are released.

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Siyar "The Great" Bahadurzada November 27, 2012 at 10:08 am

But what about everyone that bought ILWs with a PCS trigger at $20bn? Basis risk? What basis risk?

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