PCS issues first Sandy insurance industry loss estimate of $11 billion

One of the most awaited numbers in the insurance, reinsurance, catastrophe bond and associated investment markets has been the insurance industry loss estimate from Property Claims Services (PCS) for hurricane Sandy.  Typically the first estimate from PCS is released around 30 days after the event and they’ve actually been quicker in the case of Sandy and have released an initial insurance industry loss estimate of $11 billion yesterday.

Update: PCS have now increased their estimate of losses to $18.75 billion.

Yes that’s right, $11 billion, significantly lower than some of the estimates that have been discussed since the event and much lower than the $20 billion where a number of reinsurance programmes and industry-loss warranties (ILW’s) become troubled with greater loss loads. It’s important to note that Sandy was an extremely complex storm and the insurance claims process will likely be difficult and slow, so this early loss estimate from PCS has a good chance of increasing over time. However, starting at $11 billion leaves a lot of room for upwards loss creep before the industry loss total troubles said reinsurance, ILWs and any exposed industry loss based catastrophe bonds.

We received a statement from PCS, a division of Verisk Analytics, on the preliminary loss estimate. The preliminary loss estimate of $11 billion is for property & casualty insured property losses from Sandy. Gary Kerney, PCS Assistant Vice President, stressed that there are a number of qualifying factors associated with this event and the loss estimate that have to be considered.

• While there will be a major impact to personal and commercial line carriers in the areas affected by this event, a significant amount of damage was caused by flooding. With the exception of a limited amount of this flood damage being covered by the private sector, a majority of the flood damage will be covered by the National Flood Insurance Program (NFIP).
• The actual cost of repairs could increase (demand surge) due to winter weather conditions, and the lack of contractors and repair resources in many areas.
• A number of property owners (personal and commercial) may decide not to repair or rebuild for various reasons. These decisions will affect the ultimate insurance payments.
• Extended power outages are contributing to the slow development of time element losses and overall assessment of damages.
• Pollution, contamination or other environmental issues may increase repair costs.
• Until very recently, adjusters and inspectors could not gain access to many areas.
• Damage to certain infrastructures and boardwalks was significant. Whether or not any of these were insured is unknown at this time.
• Many small and seasonal businesses were severely damaged and/or destroyed. Many of those may not be insured or insured to value.
• Many thousands of vehicles and recreational boats were damaged and/or destroyed. Full assessment of these damages will take time.
• PCS will continue to monitor this event and will continue to develop additional information.

PCS will conduct a re-survey in approximately 60 days and will update the loss estimate at that time with new data gleaned from affected insurers. We find it hard to believe the loss estimate won’t increase, but as we said an $11 billion starting point may put a number of potentially loss affected reinsurance and capital market programmes in the clear.

The PCS loss estimate usually creeps upwards over time as they report at regular intervals. For example, in the case of hurricane Irene which struck a similar region in 2011, the PCS estimate began at $3.65 billion but over time rose by 18% to $4.3 billion. Hurricane Katrina in 2005 saw a similar increase in loss estimate over time, from an initial PCS reported industry loss of $34.4 billion to a final reported estimate almost two years later of $41.1 billion. In the case of another hurricane, Wilma also in 2005, the loss estimate jumped more from a preliminary estimate around $6 billion to a final estimate of $10.3 billion over a year later, an increase of 70% in this case. Ike in 2008 resulted in an increase of around 54% from $8.1 billion to $12.5 billion.

The reason for this is that it does take time for insurers to fully understand the scale of the claims and resulting losses that they face. Catastrophes of the scale of hurricane Sandy leave insurers with a complex and often technical task of collecting claims, assessing them negotiating claims payments and often dealing with regulatory issues such as the definition of Sandy as a hurricane or post-tropical storm and the impact on deductibles. In the case of Sandy, some areas have only just had power restored and have been difficult to access to survey the extent of any damage, we suspect Sandy will be no different to the storms named above and that we’ll see an increase in the next PCS loss estimate update. There is no quick or easy way to come to an accurate industry loss estimate, hence why any ILW’s and catastrophe bonds which are exposed have defined reporting intervals which specify when the final loss estimate should be received and a decision be made on whether they have been triggered or not.

Apparently there are estimates of claims costs by state which put $4.1 billion in New York from 520,000 claims, $4.05 billion in New Jersey, $700m in Pennsylvania and $500m in Connecticut.

So PCS will re-survey affected insurers every 60 days until it determines that it has reached a final estimate for the insurance industry loss from hurricane Sandy. The next update should be expected in mid-January by which time a lot of uncertainty around the final loss total should have been cleared up and a much better picture of the size of the industry loss should be available. We’re told that preliminary PCS industry loss estimate numbers are historically about 85% accurate, which if Sandy followed suit would mean a final loss estimate of nearer to $13 billion. However it is widely accepted that Sandy is complex and costs from demand surge and the long power outages, plus the points mentioned above by Gary Kerney, may mean losses creep more for Sandy than on a less complex catastrophe event.

For the catastrophe bond market this will likely help to clarify the potential impact on industry loss triggered cat bonds and while the estimate remains below $20 billion it looks less likely that any exposed bonds will be particularly troubled. For indemnity trigger and modelled loss cat bonds uncertainty still exists and will do until the indemnity loss numbers of sponsors are published or the modelling required is completed. However, the market as a whole will find the, lower than perhaps expected, preliminary industry loss estimate from PCS encouraging at this time and it could help to stimulate any new cat bond issuance that has been held back to come to market.

We’ll update you when we hear of any updates to the PCS industry loss estimate for hurricane Sandy.