U.S. storm surge risk may be greater than reinsurers (and ILS) think

A new CoreLogic storm surge study and recent findings from an analysis performed by Reuters share the same perception, that storm surge from coastal flooding is likely more prevalent than the reinsurance and insurance-linked securities markets think.

According to the CoreLogic 2014 storm surge analysis roughly 6.5 million homes along the U.S. Atlantic and Gulf Coasts are exposed to storm surge, resulting in a potential total reconstruction value of $1.5 trillion.

Generally it’s perceived, and perhaps historically rightly so, that storm surge is hurricane-driven, so typically catastrophe bonds exposed to hurricanes also cover storm surge. However, the CoreLogic and Reuters reports suggest that rising sea levels and other factors are causing storm surges and flooding, absent a hurricane, and that storm surge exposure spreads further than many believe.

The analysis by Reuters found that over the past 40 years, the number of days each year that tidal waters achieved or surpassed flood thresholds has more than tripled, in almost all areas. The findings, which are part of a broader examination of rising sea levels by Reuters, detail that in Annapolis, Maryland; Wilmington, North Carolina; Washington D.C.; Atlantic City, New Jersey; Sandy Hook, New Jersey; and Charleston, South Carolina – flood levels have been reached on 20 days per year or more since 2001 Before 1971 none of these regions had more than five flood days a year.

Speaking about the increase in flooding as a result of climate change, Executive Director of non-profit Washington-based firm Coastal States Organization, Mary Munson said; “Chronic flooding is a problem our coastal managers are dealing with every day. Flooding causes the quality of life in these communities to decrease along with the property values, while the flood insurance rates go up.”

Charleston, one of the regions looked at in the Reuters report has always had problems with street flooding, as the city is very low-lying. However, Laura Cabiness, Charleston’s director of public service, explained how the water is “deeper than usual and higher than usual, and the tide has remained higher for longer.”

Although the analysis and report emphasizes the impact of climate change, and the need for a revised look at the way storm surge exposure is modeled and assessed as a peril, the market’s first storm surge only catastrophe bond – MetroCat Re Ltd. (Series 2013-1), is a sign that companies are starting to become aware of its dangers and potential impact, while ILS investors are aware of the potential returns.

The MetroCat Re transaction covers certain zones surrounding New York City from storm surge, using a parametric trigger based on actual recorded storm surge heights from the varied areas. The first of its kind storm surge catastrophe bond covers the Metropolitan Transit Authority (MTA) which suffered large losses due to surge from superstorm Sandy.

CoreLogic’s study focuses on the actual size of potential storm surge exposure and explains how thousands of homeowners at risk of storm surge inundation simply aren’t required to protect themselves, or aware they need to, as they are not within a specific FEMA 100-year floodplain.

The Federal Emergency Management Agency (FEMA) flood zone information provides a first-look at the potential damage exposure to properties in certain areas, for a 100-year and 500-year flood event. A key issue identified by CoreLogic’s research is that storm surge exposure is greater than insurers, reinsurers and homeowners think.

In the New York, Newark and Jersey City regions alone 68% of properties exposed to the peril would not be required to purchase flood insurance under current FEMA zones. In the Virginia Beach, Norfolk and Newport News areas the number is 86%, and in Philadelphia the number is 85%. So it’s clear that organisations and homeowners alike aren’t fully aware of the potential damages a significant surge could on their region or properly protected.

Should that change, so more homes and businesses have to purchase flood insurance, the exposure to storms surge in the insurance market will grow, requiring more reinsurance capacity and likely a greater contribution from ILS, catastrophe bonds and collateralized reinsurance.

Among the perils and exposures in the ILS and catastrophe bond market, storm surge must be up in the top three. Despite not being a peril that is covered directly by cat bonds, but rather as part of a layer of wind and surge exposed property exposure, the amount of exposure to ILS funds and capital is likely huge.

In fact, if you think about the potential for storm surge exposure to impact the ILS and collateralized reinsurance market, storm surge could actually be in the top three perils in the market, after U.S. wind and U.S. earthquake. As such, any information that surge exposures are underestimated, as this study and analysis suggest, should be taken seriously.

You can access the Corelogic storm surge study via its website here.