Hurricane Ida hits Cat 4, landfall location key to ILS market impact

The location of hurricane Ida’s anticipated strong-to-major hurricane landfall in Louisiana on the US Gulf Coast will be key to insurance-linked securities (ILS) market impacts from the storm. The overall industry loss is anticipated to be in the billions of dollars, but with a wide-spread depending on landfall location and strength. Hurricane Ida has now reached Category 4 with winds of 150 mph.

Updated: We’ve updated this article through Sunday with the latest data points and some updated thoughts on possible impact scenarios.

Latest, 1pm BST Sunday: Hurricane Ida continues to intensify as it approaches Louisiana. The NHC pegs hurricane Ida’s sustained winds at 150 mph now, with higher gusts, Minimum central pressure has dropped to 930mb. NOAA hurricane hunter reconnaissance aircraft have visited the storm in the last hour and suggested possible surface winds as high as 160 mph, meaning hurricane Ida could be approaching Category 5 strength.

Catastrophe risk modeller RMS has highlighted that hurricane Ida’s wind-field is smaller than 2005’s Katrina was, with the firms HWind unit giving Ida an Integrated Kinetic Energy measurement of 45 TJ (Terajoules), compared to Katrina that was around double. While this is good news, as the maximum winds don’t span such a large area, hurricane Ida is likely to be stronger at landfall. This also further underlines the landfall location as being critical in the eventual industry loss impact, given the smaller peak wind-field.

Another notable update is that there are some warnings that New Orleans levees could be overtopped by the surge in some areas, although authorities insist they will hold, given the upgrades made post-Katrina (more on that here from nola.com).

3pm BST, Sunday: Plenum Investments said that, based on analysis of the latest forecast track, it anticipates some minor impacts to its range of catastrophe bond focused investment funds.

6pm BST, Sunday: Hurricane Ida’s eye has now made landfall very close to thee major energy center of Port Fourchon, with sustained winds of 150 mph and higher gusts, while the minimum central pressure was reported as 930mb.

Market sources we’ve spoken with in the last hour suggest an industry loss of above $10 billion should be anticipated from hurricane Ida, with the precise track the storm takes over the next few hours set to drive the eventual quantum. As we explained earlier, the nearer the strongest winds come to New Orleans the larger the eventual loss is anticipated to be. So any movement east or west could change the outcome significantly.

9am BST, Monday: A few thoughts on hurricane Ida’s loss potential. Industry sources anticipate something in the double-digit billions of dollars, but how high is more challenging to predict with the storm impacts ongoing.

Specialist catastrophe bond, insurance-linked securities (ILS) and reinsurance investment manager Twelve Capital said late on Friday that based on the forecast track for tropical storm Ida, which at the time was soon expected to become hurricane Ida, the impact to ILS positions in its funds would not be significant.

But, Twelve Capital cautioned that movement in hurricane Ida’s track over the next few days up to landfall could take it ashore somewhere that the impacts and losses to reinsurance and ILS positions would be greater, making Ida a storm to watch closely over the weekend.

“Landfall is predicted to occur very early morning (local time) on Monday 30 August. It is likely that this storm will strengthen at least into a category 2, most likely even a category 3 hurricane,” Twelve Capital explained.

Adding that, “As always with major hurricanes, the exact location of landfall will be the key determining factor for insured losses and ultimately for the impact on Twelve Capital’s positions.”

As we explained earlier today, Ida threatens to become the first notable hurricane loss of 2021 for reinsurers & ILS markets.

How notable that is, depends on intensity and landfall location, to a large degree, as well as factors like surge height, forward speed of the hurricane and also its overall wind-field size.

All of this will factor into how much of an insurance, reinsurance and perhaps ILS or catastrophe bond market loss hurricane Ida could deliver.

As of Sunday morning, UK time, hurricane Ida’s rapid intensification has continued and the storm has reached Category 4 strength, with sustained winds of 140 mph and higher gusts, according to data from hurricane hunter aircraft and NOAA’s doppler radar.

Meteorologists warn that intensification may continue, or at the least Ida may sustain strong Category 3 to 4 strength right up to landfall, which is currently anticipated to be in Louisiana, just south of New Orleans, later today. Grand Isle and other low-lying locations are expected to receive some of the worst impacts, while New Orleans will experience significant hurricane conditions it now seems.

Impacts are set to be catastrophic for the landfall location and region surrounding it, with ramifications for insurance, reinsurance and ILS positions.

Twelve Capital on Friday explained the vital importance of the landfall location, saying, “The latest projection point towards this storm making landfall around 80-100km West of New Orleans in an area of Louisiana that is not as densely populated. In that case, Twelve Capital does not expect any significant direct impact on its ILS positions.”

But qualified this by adding, “However, as with all live events, there is a high level of uncertainty around the final strength and location of landfall. An intensification or a landfall in a more densely populated area, such as New Orleans, could result in significant increases in insured losses thus also affecting ILS portfolios. Whilst this is not expected at this point, it cannot be fully ruled out until landfall has taken place.”

Hurricane Ida is likely to come ashore a bit closer to New Orleans that Twelve Capital had been discussing Friday, perhaps suggesting an increasing chance of a more significant industry loss impact.

With only around 15 to 16 hours to go until landfall, as of this writing, the track hurricane Ida takes across the Gulf of Mexico as it nears the coast remains key to the eventual quantum of ILS market impact.

There is a chance of a wobble or two in the track, which could bring the strongest winds in the right-front quadrant of the eyewall ashore slightly further east or west, which has the potential to change the damage outcome.

In addition, any shift further east could push more surge waters ashore towards the New Orleans levee system, again potentially increasing the potential overall loss.

Also driving home the importance of the landfall location in the quantum of insurance market loss was Andrew Siffert, Senior Meteorologist at broker BMS Group.

In his Friday evening update on the storm that became hurricane Ida, Siffert explained, “Either a strong Category 2 or Category 3 hurricane making landfall somewhere between Grand Chenier, LA, and the Mississippi Delta will be impactful to the insurance industry. However, the magnitude in terms of loss comes down to track.

“It is not until the catastrophe risk models start issuing stochastic track guidance that one realizes that a 50-mile difference in the landfall area can have a huge impact on the vulnerability and exposure that drive the loss.

“It could range from a simple single-digit billion dollar loss to a 10’s of billions dollar loss if the storm were to track closer to a major metro area like New Orleans. These models can be very sensitive to track and intensity, which is why the intensity forecast along with the track matters; but, at this early stage for track all scenarios within the NHC cone of uncertainty are on the table.

“This is why there is likely to be a large range in estimated insured losses over the next 24-hour hours.”

As of Saturday morning, our industry sources told us that modelled loss scenarios being discussed continued to range from a low single digit billion dollar industry loss, up to as high as $40 billion, depending on the landfall location. With a further eastward track seen as the main factor that could result in even higher damages.

New Orleans is in the cone of hurricane Ida, but to the right of the centre of the forecast path, which does mean some of the strongest winds could impact the metropolitan area, depending on landfall location.

Catastrophe modeller Karen Clark & Company said, “The closer the track is—or more specifically the closer the strongest winds on the right of the track are—to New Orleans, the higher the losses will be. A shift in the track of just 20 miles will make $$ billions difference in the property damage and losses.”

As of Sunday morning the track is looking a little further east, bringing winds closer to New Orleans and of course hurricane Ida has strengthened considerably into the Category 4 monster hurricane that had been feared.

Hurricane Laura of 2020 was a Category 4 storm that struck Louisiana and the industry loss estimate seems to be around the US $10 billion to $12 billion mark for that storm in the eyes of some of our contacts.

Laura struck further west that hurricane Ida, in an area where insured values were less concentrated and exposure lower, so a Category 3 or 4 at landfall hurricane Ida could potentially be a higher industry loss it seems.

We’ve spoken to some industry contacts this morning, Sunday, that are suggesting if hurricane Ida does not weaken before coming ashore at landfall and continues on the current forecast path, so remaining closer to New Orleans, then the insurance and reinsurance market loss could easily rise above $10 billion, possibly closer to $20 billion. Any shifts nearer to New Orleans could raise the industry loss potential again, we understand.

It’s important to note these are model outputs, so always need to be considered directional and the landfall position remains key in determining the eventual market loss.

Impacts to the ILS market are always challenging to predict, but at major hurricane strength some level of ILS market impact is likely. At the higher, tens of billions of dollar loss scenarios, ILS market impact would be assured, at the very least in private ILS, collateralised reinsurance and retrocession, plus for some quota shares and sidecar structures.

For catastrophe bonds, at the lower levels of industry loss some further erosion to aggregate deductibles is possible.

The higher the eventual industry loss rises, the more likely it is that some cat bond losses could be seen, but again this is very dependent on landfall location and the ultimate size of the insurance industry loss from hurricane Ida. Most cat bonds that are per-occurrence in nature would require a particularly significant industry loss to occur from hurricane Ida for any to be triggered.

Modelled intensity guidance from Tropical Tidbits can be seen below, which continues to show that models anticipate storm hurricane Ida being a major hurricane when it makes landfall in Louisiana.

You can also see the NHC’s peak storm surge map for hurricane Ida below. The storm surge totals have been increased, with now up to 16 foot of surge seen as possible, which would be extremely impactful for coastal dwellings and energy infrastructure:

This will be a weekend where anyone involved in catastrophe modelling, actively managing portfolios of risk such as in catastrophe bonds and ILS, or that is responsible for buying last-minute or live cat protection and hedges such as industry loss warranty (ILW) products, may find they need to stay glued to the tropics.

At this time we’re told there hasn’t been evident buying interest in live cat, although some tentative enquiries on pricing have been reported to us by some broker contacts.

As of Sunday we’re told there has been some buying interest, but our broking sources suggested no trades have actually been made at this time. With hours to landfall now there is still a chance live cat trades could happen and of course some private trades may already have been made.

We’re told there is some parametric insurance exposure at Louisiana energy and chemical infrastructure, onshore and offshore, so that is another possible avenue for loss to emerge.

The energy sector has largely shut down in the path of hurricane Ida and losses to some offshore or onshore assets that could not be moved is likely to occur with a storm of this intensity. Port Fourchon, which is the US’ major oil and gas port, could experience some particularly strong winds and high surge.

It must be remembered though, that Sunday will be a particularly difficult day for those in the path of hurricane Ida and all thoughts must be with the lives and livelihoods that will be affected by this significant and potentially catastrophic storm.

The NHC is calling hurricane Ida “extremely dangerous.” It is going to be a long and challenging 24 hours for those in its path.

Insurance, reinsurance and ILS market interests can keep track of developing hurricane Ida over on our 2021 Atlantic hurricane season page and we’ll update you should a more significant threat develop.