Hurricane Ida could rank second only to Katrina in terms of cost to the insurance industry should claims reach the top end of estimates published to date by modelling companies.
- BI losses due to power outages central to wide-ranging loss estimates
- Power outages mean long-tail event expected for BI claims
- Midpoints of ranges from RMS and AIR both above $20bn
- Northeastern loss bill unclear but may total in billions
At the top end of RMS’ $25bn to $35bn forecast range, Ida would be costlier than 2012’s Hurricane Sandy and 2017’s trio of major loss events – Harvey, Irma and Maria.
And the RMS forecast range is before losses from the northeast flooding associated with Ida’s remnants, which could also total in the billions of dollars, are factored in.
The RMS estimate was significantly above figures issued by three rival modelling firms following Ida’s landfall in Louisiana on 29 August, the 16th anniversary of Katrina’s record-breaking landfall in the state.
AIR Worldwide had estimated insured losses at between $17bn and $25bn, ahead of the $18bn estimate from Karen Clark & Company (KCC) and the $14bn to $21bn range announced by CoreLogic.
Some important discrepancies between what is included in the estimates explains some of the difference. RMS included $2.3bn to $4bn of National Flood Insurance Program losses in its range, as well as $700mn to $1.5bn of offshore losses – both sources of loss were not factored into the estimates provided by the other modelling firms.
Once adjusted for these factors, the midpoint of the RMS range of $21.6bn to $30.5bn stands at $25.75bn, compared with a $21bn midpoint for the AIR Worldwide range, meaning both of the big two modelling firms are pointing towards a strong potential for a $20bn+ private market onshore loss.
Aside from KCC, each of the modelled estimates presents a wide range of possible losses, a reflection of the high level of uncertainty around the ultimate cost of the event. At the centre of this uncertainty is the extended power outages in southern Louisiana, which look set to continue for several more weeks.
Karthik Ramanathan, vice president in the research and modelling team at AIR Worldwide, said the lack of power will be a significant driver of commercial losses related to the event.
“Even while emergency responders work to restore power, I still expect it will be several more weeks before it is restored. This lack of resilience in the power infrastructure means it will be a long-tail event for business interruption claims, and there is major uncertainty around what this could do to the loss bill.
Ramanathan said the extent of these losses would be dependent on what is covered through policy language.
“Policies could be subject to endorsements which may have sublimits or deductibles included. Deductibles could be in the order of three days without power, so losses could very quickly accumulate on this basis. Some endorsements may also provide cover without the need for physical damage, while some could also include food spoilage which could be a driver of claims.”
Mohsen Rahnama, chief risk modelling officer at RMS, said the widespread power outage will significantly delay full recovery and lead to material impacts to specialty lines.
“Southern Louisiana has a high concentration of petrochemical plants, refineries, marine cargo and port exposures, power plants and other high-value industrial facilities that were impacted by Ida,” he said.
“These businesses rely heavily on the state’s power grid. With prolonged anticipated recovery times, we expect material business interruption losses to these lines on top of varying degrees of infrastructure damage they sustained.”
Duration of winds
Another distinguishing factor of Hurricane Ida was the storm’s slow decay as it moved over land, with the marshland over which the storm tracked providing the fuel which allowed it to maintain major hurricane force winds for several hours.
Rahnama said buildings and infrastructure in the region would never have experienced such strong hurricane wind intensity, with winds remaining at Category 4 strength for six hours as the storm moved inland.
AIR’s Ramanathan believes the storm’s slow decay will likely impact the overall loss by several billion dollars.
The storm’s track was also characterised by a late wobble which took 90mph winds over metropolitan New Orleans and away from nearby Baton Rouge.
As a result, Ramanathan said it is likely around 30 percent of the total losses from the event will be incurred in the metropolitan New Orleans area.
“Through aerial imagery and social media we have seen a lot of evidence of damage in New Orleans. Many residential properties have seen roof damage, which will also allow rainfall to penetrate into the buildings.”
Water intrusion will increase potential for mould claims, alongside the lack of power and the high temperatures in the region, another factor which is driving uncertainty in the ultimate loss bill.
“Baton Rouge was spared the horrors of the storm but in the eastern parts of the city there has been damage from treefall on homes,” Ramanathan said.
Even without Ida’s late wobble, Ramanathan said a more direct hit on Baton Rouge with 90mph winds would still likely have resulted in a double-digit billion-dollar loss.
Ongoing challenges over the cost of labour and materials, as well as the recent surge in Covid-19 cases in Louisiana, could also push losses towards the higher end of the range of estimates.
Ramanathan said the region was now effectively having to respond to two disasters at once, which will further complicate the recovery.
Jeff Waters, senior product manager for RMS North Atlantic hurricane models, said the multiple hazard and loss impacts of the event would further complicate the claims process.
“Many areas impacted by Ida’s winds were also impacted by storm surge, precipitation-induced flooding, and the hurricane events of 2020.
“In these instances, loss attribution and differentiation may become more complex, leading to longer claims settlement periods,” he said.
The biggest uncertainty remains the cost of flooding in northeastern states resulting from heavy rainfall as Ida made its way north as a post-tropical cyclone.
None of the modelling estimates to date have factored in damage from these floods, which could also total in the billions of dollars.
How these northeast floods are defined from a (re)insurance perspective will play a significant role in how claims pan out, particularly whether the hours clause comes into play for larger national programs.
Given the complexity of modelling rainfall-induced flooding, it will likely be some time before the full extent of these northeast impacts on carriers becomes clear. But there is potential for the storm’s later impacts to provide the sting in its already long tail.