Should We Expect the Unexpected? – Catastrophe Exposure
While fall hurricane activity shouldn’t surprise anyone, most of us probably purchased at least one bag of Halloween candy this past October, confident that 2012 was going to be a light hurricane year from a loss perspective.
Sandy, making landfall in the U.S. on October 29th, obviously changed that. Hurricane Sandy stretched 945 miles in diameter and struck at high tide during a peak moon phase, which caused severe flooding in several states. As of January 17th, individual company loss announcements have totaled over $17B and most modeling firms are estimating $20B–$25B in industry losses. It is likely that Sandy will end up the 3rd most expensive hurricane in U.S. history (behind Katrina in 2005 and Andrew in 1992). New York’s Metropolitan Transit Authority recently revealed that its loss from Sandy will be in the neighborhood of $5B and expects to collect $1.075B from its insurance program. Many companies with offices in New York’s financial district have only recently been able to access their buildings.
The Insurance Information Institute estimates that 1.38 million claims will be paid to homeowners, business owners and vehicle owners. With a record $583.5B of surplus, our industry is well positioned to meet the financial commitments that Sandy’s aftermath entails.
What probably needs further understanding, however, is that events like Sandy are not as unique or out of the ordinary as the media portrays them to be. In August of 2012, before Sandy was a reality, Karen Clark & Company published a study reviewing historical U.S. hurricanes that, if they had made landfall in 2012, would have caused significant damage. The study identified 28 storms making landfall since 1900 that would have caused $10B or more in damage had they occurred in 2012. Among them was the “Long Island Express” - a Category 3 hurricane which struck New York on September 21, 1938 causing significant damage. Karen Clark & Company estimates that the same event would have caused $35B if it happened in 2012. Demographics have shifted with more people living in catastrophe-prone areas, causing the density of exposed values to increase exponentially. Coastal exposure in Florida, for example increased 24% from 2004 to 2007. This trend is expected to continue and our industry will need to work through this issue.
While models include degrees of uncertainty and their loss estimates are not exact, developing an understanding of the past can help us better prepare for the future. We know significant catastrophic events will happen again and we will likely see several of them in our careers. Each will have unique attributes and while we can try to learn to “expect the unexpected,” we may be better served by broadening our understanding of “expected.”