One of the recurring traits of major catastrophe losses is the presence of a compounding loss factor which drives up the eventual industry bill. These compounding factors often result from the failure of man-made infrastructure which then triggers financial losses which would not have otherwise occurred.
- Final loss picture likely to take a long time to emerge
- Late wobble in track could have significant bearing on losses
- Power outages will increase damage impacts and delay repairs
- Flood will be potential source of wind v water claims disputes
- Covid-19 will make loss adjusting challenging
- Loss amplification likely from materials and labour inflation
Following this year’s previous costliest event, February’s winter storms in Texas and other US states, the main driver of claims was not the big freeze itself but the subsequent failure of the power supply.
Similarly, in the wake of Hurricane Katrina – the costliest insured catastrophe on record – a substantial portion of the loss was driven by the failure of the poorly maintained levees, which failed to protect New Orleans from catastrophic flooding.
In the immediate aftermath of Hurricane Ida, there remains uncertainty about the ultimate industry cost from the event. While early modelling guidance has suggested a range of $15bn to $25bn (KCC is the first modeller to estimate post-event with an initial figure of $18bn, published on 1 September), this will not have included several factors which could yet amplify the cost of Ida and see it become one of the costliest events on record for the (re)insurance sector.
The two historical events mentioned above both highlight issues which could serve as compounding factors in the Ida loss.
Following Katrina, which made landfall 16 years to the day before Ida, substantial improvements were made to the New Orleans levee system. Ida has provided the most severe test of the city’s rebuilt flood protection system since its failure following Katrina, which led to more than 1,800 deaths. The re-engineered levee system appears to have done its job in protecting the city.
Flood-related disputes could yet amplify the claims bill, given the industry’s history of wind versus water disputes in the aftermath of major hurricanes when the immediate cause of loss is unclear.
As this year’s Texas winter storms highlighted, the loss of power can significantly inflate insured losses from an event. In that scenario, the loss of power triggered frozen pipes which then burst, causing severe damage to properties.
In the aftermath of Ida, the concern is around water intrusion and potential mould growth, which can significantly increase damage costs.
“Any systemic and prolonged failure to infrastructure during an event of this magnitude can very quickly accelerate direct and non-direct impacts to life and property,” warned Steve Bowen, head of catastrophe insight at Aon.
The challenge with Ida is the lack of clarity around when power will be restored, with the transmission lines that provide New Orleans with power lying in the Mississippi River.
“The power outage may become the story of the long-term impacts of this storm,” Eric Uhlhorn, principal scientist at AIR Worldwide, told The Insurer.
He said the availability of power would be critical as the city looks to begin making repairs in the storm’s aftermath.
The region’s hospitals were already contending with a surge in Covid-19 cases ahead of the storm’s arrival and will now be reliant on generators until power is restored.
Labour and materials
A global shortage of building materials has proved a significant inflationary factor for repair costs over the past 12 months.
As AM Best has noted, the US consumer price index rose 5.4 percent for the 12-month period to July 2021, although it should also be noted the price of lumber is now well off the highs reported in May this year.
Continued supply chain disruptions related to Covid-19 will add further inflationary pressures, Guy Carpenter has reported.
Demand surge will be further compounded by the uninhabitable conditions in the most severely damaged regions to the south and southwest of metropolitan New Orleans.
For loss adjusters, the pandemic has made on-the-ground site assessments more challenging and this will again be a factor with Ida.
Ida made a late shift in track over land which brought the storm’s strongest winds closer to New Orleans, but also largely spared Baton Rouge, Louisiana’s second largest city.
This late wobble could have a significant bearing on losses, which will need to be accounted for in modelled estimates.
Another complicating factor from Ida was its slow decay over land, which meant the storm brought damaging winds further inland than anticipated.
Heavy rain from Ida that led to widespread flooding will likely cause economic losses in the billions of dollars. Homeowners policies typically do not cover flood damage, although those in flood zones may get cover from the government-backed National Flood Insurance Program, potentially leading to reinsurance claims on its cat cover.
Commercial property insurers may also be in line for meaningful flood-related claims, where it has been purchased as an optional coverage.
As with any major catastrophe event, these factors will take time to play out and it will be no surprise if Ida losses escalate beyond early expectations.
But the event will not compare in cost to Katrina’s impacts of 16 years ago, with the industry bill likely to be closer to that experienced from each of the three major landfalling events of 2017 – Harvey, Irma and Maria – but significantly ahead of last year’s costliest Louisiana landfall, Hurricane Laura.