Irene Will Slam the East Coast -- and the Insurance Industry
Hurricane Irene is bearing down on the East Coast and threatens to be the strongest hurricane to hit the region in at least seven years. Some areas, like eastern New Jersey and New York City, simply don't have the regular experience in dealing with these types of storms. According to a study done by reinsurance company Munich Re, a strong hurricane moving up the East Coast and landing in New York City could cause an estimated $100 billion in insured losses -- on the order of the damage wrought by Hurricane Katrina.
As big as those numbers seem, insurance companies might get off more lightly, depending on the nature of the damage. Widespread flooding wouldn't impact private insurers much, as the federal government is on the hook for those losses. Even so, it won't be a pretty picture for the insurance industry, which, by the end of June, had already seen what would normally be the average full year's worth of disaster losses.
Irene's Big Apple road trip
Even though it currently ranks as only a category 2 hurricane, Irene's damage could parallel Katrina's because it will pass over such densely-populated areas, as you can see from this National Weather Service map (click to enlarge):
Few storms deliver hurricane force winds to New Jersey and New York the way Irene is expected to. According to David Zelinsky, a National Weather Service meteorologist I spoke with, New York City alone is expected to get between 6 and 10 inches of rain on average, with some areas getting as much as 15. Although it's still too early to know how big the storm surge -- large amounts of water that accompany a storm in addition to whatever the tide brings -- might be, the North Carolina coast is expected to get 6 to 11 feet, while the New Jersey shore might expect 3 to 6 feet.
Even though Irene has slowed a bit, it's still powerful. "The winds still exceed 100 miles an hour and it's a very large storm," Zelinsky says. Areas within 90 miles of the center are expected to feel hurricane-force winds, and up to 290 miles away, it will be like sitting through a tropical storm.
Rain, rain, go away
Hurricanes damage property in several ways, according to Steven Weisbart, senior vice president and chief economist of the Insurance Information Institute (III):
Property can be rendered useless by wind, by water, by loss of power -- a whole bunch of reasons why you could be out of commission. And then you have what we call consequential loss. If you lose power and you've got a restaurant [for example], you can't serve meals, you can't preserve the food in your freezer.Stores will lose business from consumers who are stuck at home. Any sort of service business that requires showing up at a residence or business can plan on losing income. Communications, high tech, and online retail companies could find themselves unable to satisfy consumer demands.
For the insurance industry, the nature of the damage policyholders suffer is paramount. Private insurers don't include flood coverage on their policies because they can't sustain the sort of widespread simultaneous losses that high water in their coverage areas can cause. In 1821, a major hurricane left Manhattan under 13 feet of water.
Who ya gonna call? FEMA
That's exactly why Congress created the National Flood Insurance Program in 1968. American property owners, renters, and businesses have taken advantage of the opportunity -- and the NFIP. Over the last ten years, the average flood claim has been $48,000.
As of July 30, Florida had taken out by far the largest number of NFIP policies -- 2.07 million of them, for almost $470 billion in coverage. However, states in the Northeast have significant numbers of policies. There are almost 230,000 in New Jersey, with a total value of $51.9 billion. In New York, there are just over 169,000, whose total value is $39.4 billion.
Last year, New Jersey had the highest number of claims (4,690) and the second-highest payments at $99.6 million. New York was third in number (2,210) and eighth in total payments ($21.1 million).
One drawback: the largest NFIP policy available to homeowners covers just $250,000 in damage. Given real-estate values in New York and New Jersey, that might be a drop in the bucket.
Getting off light isn't cheap
Even if commercial insurance companies manage to avoid some significant loss due to floods, it will still be a tough year for them. According to Weisbart, disaster losses have escalated over time. Ever since 2001, the average has been about $20 billion a year. Prior to that, only Hurricane Andrew in 1992 pushed yearly losses to that level.
There are two major reasons for the increased losses. One is the increasing number of natural disasters the country sees by year. Here's an III graph that illustrates the progression (click to enlarge):
The other factor is that over half the country lives within 50 miles of the coast, which means more residences, more businesses, and more potential losses. By their choice of where to live, citizens are virtually ensuring that there will be more property damage each year. "And, to some degree, we are, as taxpayers, subsidizing them through the federal flood insurance program, which makes it easier for them to finance that location," Weisbart says.
This year has been a busy one for natural disasters, as the III graph below shows (click to enlarge):
Six months into the year, we've already crossed the $25 billion line. Depending on Irene's strength -- and, according to Weisbart, Irene could rack up tens of billions in insured damage -- 2011 could become the second worst catastrophe loss year on record since 2005.
Related:
- Billion-Dollar Weather Disasters: A New Challenge for Business and Regional Economies
- Hurricane Irene: 5 Steps to Take Now
- Irene bears down on N. Carolina coast
- Monster hurricanes that have hammered East Coast
- Hurricane Irene may test cell phone networks
Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.
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