Reinsurers on hook for over $1 billion NY Metropolitan Transportation Authority Sandy damages

The New York Metropolitan Transportation Authority (MTA) expects to pass on over $1 billion worth of damages caused by hurricane Sandy to insurers and reinsurers, according to a presentation from their latest board meeting. The MTA expects to suffer a loss of around $5 billion thanks to the damage caused by Sandy to New York’s transit systems such as the subway system, railroads and road or rail tunnels.

The estimates given in the presentation on the 28th November, which you can find here, are stressed as being provisional. As with almost every other loss estimate from Sandy we expect there to be some increase, rather than any decrease in these numbers. The MTA puts their early estimate of total losses at $5 billion and break that down to $4.75 billion of infrastructure damages and $268m of operating losses.

The MTA is a complex entity with cover coming from a number of sources. FEMA are supposed to cover as much as 75% of the infrastructure damages. They have a captive insurer who is responsible for paying $25m retention and then they have a maximum of $1.075 billion of cover from the global reinsurance markets. That could leave the MTA on the hook for as much as $950m of uninsured infrastructure damage. Their operating losses are expected to be mostly recovered through business interruption insurance and FEMA support.

The MTA says that it could take two to three years for them to receive full settlement of claims and government support. While waiting for settlements the MTA needs to begin spending money on infrastructure immediately and will have to take out bridging loans to finance itself in the interim. Here lies the opportunity for enterprising and innovative reinsurers to come up with risk transfer that pays out more quickly and meets the immediate recovery needs of organisations such as the MTA.

Some sort of hybrid catastrophe bond or parametric instrument to take the top layers of risk out of the traditional market and offering a much faster settlement would be ideal in cases such as this. The market regularly discusses how to facilitate these sorts of covers and options are available but more needs to be done to market these tools and ensure clients understand how they can fit into their overall reinsurance or risk transfer program.

Finally, this $1.075 billion of losses that will be passed onto the re/insurance market is not included in the current industry loss estimates from risk modellers, at least AIR and RMS certainly do not include MTA losses in their most recent estimates, we’re not sure about EQECAT. This further suggests that the actual burden on re/insurers from hurricane Sandy is likely to be higher than any estimate mid-point we have yet seen.