A repeat of 2005’s hurricane Katrina hitting in an identical manner with exposure values as we see them now but with greater influence from climate change factors, could drive an economic loss of as high as $200 billion, according to analysis from Swiss Re.
A new report from Swiss Re asks whether the United States would be prepared today for a repeat of 2005’s devastating hurricane Katrina, a storm that the reinsurance company calls “a watershed event for re/insurance as the most expensive natural catastrophe for the global insurance industry to date.”
While there have been significant efforts to improve New Orleans resilience to hurricane winds and storm surges, the exposure has actually increased in the last fifteen years, leaving the potential for much higher losses should hurricane Katrina ever be repeated.
The economic cost of 2005’s hurricane Katrina is estimated at around $160 billion, in 2020 USD.
Private insurance and reinsurance companies were responsible for paying around US $41 billion of the loss, based on 1.7 million claims for residential, commercial and automotive damage in the US.
Re/insurers paid another $8 billion for damages to offshore energy facilities in the Gulf of Mexico, Swiss Re’s report explains.
While the Federal Emergency Management Agency’s National Flood Insurance Program (FEMA NFIP) paid another $16.3 billion for publicly-insured losses
As a result, hurricane Katrina’s total insured loss was over $65 billion (in 2005 USD), but accounting for inflation, Swiss Re says this would be equivalent to nearly $86 billion (in 2020 USD).
The gap between a 2020 USD $160 billion economic loss and a total insurance and reinsurance industry loss (private and public) of $86 billion, means that roughly 46% of the total damages from 2005’s hurricane Katrina went uninsured, demonstrating the protection gap that exists even in the United States.
But looking at the exposure in the same region today, reinsurance firm Swiss Re’s Institute researchers found that the $41 billion private re/insurance market loss would equate to around $54 billion in 2020 dollars.
But, estimating the cost to the insurance and reinsurance industry of a major catastrophe event based on inflation alone does not take into consideration the changing risk profile and values at risk in the affected region, Swiss Re’s Institute explains.
As a result, the Swiss Re researchers ran their own models to look at how a repeat of hurricane Katrina could impact the region based on today’s understanding of the risk profile, resilience and values exposed in the New Orleans and Gulf Coast region.
“If Hurricane Katrina were to hit the US in 2020 with the same wind and storm surge as 2005, but with current exposure information and updated flood protection and vulnerability assumptions, the privately insured losses in the US alone could rise to 60bn,” the researchers found.
That excludes the offshore losses to energy platforms and also the publicly insured NFIP flood losses.
But the economic costs, in terms of exposure, have risen rapidly as well, with Swiss Re’s analysis showing that a repeat of hurricane Katrina in 2020 could cost around $175 billion.
The private re/insurance market loss of $41 billion back in 2005 is just 26% of the $160 billion economic impact of Katrina.
So, fast-forward to today and a repeat of hurricane Katrina driving a $60 billion private insurance and reinsurance market loss would still only cover 34% of the projected economic costs.
So while slightly more of the loss would be covered by insurance today, it’s still only a small percentage of the total economic costs from a storm of the magnitude of Katrina.
Factor in climate change and sea level rise and Swiss Re’s researchers believe that a repeat of hurricane Katrina could cost $200 billion on an economic basis, with just 32.5% covered by insurance, or $65 billion.
The researchers conclude, “Considering that sea level in the barrier islands near New Orleans is now rising by over one inch every two years, a six-inch increase in sea level — and an event like this could happen in just over a decade.
“In these scenarios, the majority of the insured loss would be caused by wind due to the large flood protection gap in the US.
“While climate change is a real factor at work that could significantly impact total insured and economic losses, the impact of a changed climate in 2020 compared to 2005 for an event like Katrina is, with high likelihood, still secondary to potential changes in population, exposure, vulnerability and flood protection.”
Clearly, a repeat of hurricane Katrina today would create massive losses for the reinsurance industry and for insurance-linked securities (ILS) funds, with a significant amount of catastrophe bonds at-risk of paying out as well.
It’s the type of scenario nobody wants to see, given the extreme impacts to human life the original hurricane caused in 2005. While resilience seems slightly better today and insurance penetration has perhaps picked up a little, based on the forecasts for how much of the loss might be covered, a Katrina repeat would still cause immense suffering and economic damage, highlighting the need for better/more risk management, risk mitigation and of course risk transfer.