As the Northeast U.S. region continues to deal with the effects of Hurricane Sandy, it remains evident that flooding caused by substantial and continued rainfall and record storm surges will compose a significant component of catastrophe damages.
Catastrophe modeler EQECAT, Inc. recently released a post-landfall estimated insured industry loss from Sandy in the $10 billion-$20 billion range, with economic damages of $30 billion-$50 billion. This follows AIR Worldwide's estimated insured industry loss to onshore U.S. property exposures of nearly $10 billion, with a likely uncertainty interval of $7 billion-$15 billion. The ultimate level of insured losses remains highly uncertain, and Fitch considers the above modeled estimates to be preliminary for purposes of its own analysis.
Fitch expects that the (re)insurance industry will be able to absorb this level of losses given its solid capital position with below-average catastrophe losses experienced thus far in 2012. At the high end of the range, a $20 billion loss represents a manageable 4% of U.S. industry capital. Fitch anticipates that primary insurers will bear a greater share of losses at the low end of the range. However, as industry losses reach $10 billion and higher, the reinsurance industry will receive a greater share of losses.
Part of the uncertainty in estimating what will be the ultimate insured loss from this event relates to the complexity of assessing insurance losses from such a large, intense storm over a widespread region, particularly with respect to the sizable flooding. These factors include determining whether a loss is caused by wind or flood, the level of take-up rates for commercial flood policies, and uncertainty in the application of hurricane deductibles.
Homeowners' insurance policies cover wind losses, but generally do not provide coverage for flood damage. Flood coverage for homeowners is provided by the National Flood Insurance Program (NFIP), which is administered by the Federal Emergency Management Agency (FEMA). The sale of such coverage is done via private insurance companies, but is funded and backed by the federal government.
Fitch highlights that the question of wind versus flood as the cause of loss has been very contentious in the past, most notably generating numerous lawsuits in the wake of Hurricane Katrina in 2005. While the industry has likely improved its ability to manage this risk since that time, the industry remains prone to litigation, and thus it could still take several years before a final insured loss total from Sandy is known.
Coverage for some types of water damage is provided by homeowners' policies to the extent that water damages a home before the water comes in contact with the ground. This would include damage directly caused by Sandy's heavy rains. Any losses from theft, fire, or explosion as a result of the flooding are also covered by homeowners' insurance. Additionally, auto damage caused by the flooding would typically be covered if the driver has comprehensive coverage.
Many commercial policies cover both wind and flood losses, although insurers often require a separate commercial flood policy and put in place a flood sublimit. Business owners can also purchase flood insurance from the NFIP, but with a policy limit of $500,000 for commercial properties, it is often inadequate for many organizations. As a result, commercial insurers provide a significant amount of flood insurance protection to businesses.
Estimating the amount of commercial flood insurance exposure from Sandy is challenging and subject to assumptions regarding take-up rates for commercial flood policies. Fitch notes it is likely that take-up rates have increased recently following the experience from last year's Hurricane Irene, which affected much of the same region as Sandy. As a result, exposure to commercial flood insurance may be heightened.
Fitch notes another potential uncertainty in developing insured loss estimates is that Sandy made landfall as a post-tropical cyclone, just below the official category 1 hurricane level status. As such, it is expected that the use of a hurricane deductible will vary by insurance company and by state.
Hurricane deductibles are generally a percentage of the home's insured value (typically from 1% to 5%), and are usually higher than the normal flat dollar wind deductible. Thus, to the extent that hurricane deductibles are waived, as was often the case for Irene, insurance industry losses would increase.
Because of the challenges in developing credible insured loss estimates at this time, Fitch plans to focus its next phase of analysis on the sensitivity of both the industry and individual insurers to a range of hypothetical loss scenarios, and expects to provide commentary on this analysis in the coming days.
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