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Three weeks after Sandy hit the coast of New Jersey and New York some 60,000 people were still reportedly without power. Damage from the storm was huge, with current estimates suggesting it may rank as one of the three costliest natural disasters in recent history. Governors from the states most affected have come out with damage estimates that approach $100 billion. This might at first look like an event that would have a major impact on the commercial property and casualty insurance market, but its worth taking a closer look and drilling down a little to see what’s really happening.
Let’s peel the onion: much of the reported damage from Sandy was to public infrastructure, roads, bridges, subways, power lines and poles, public utilities, etc. Most of that property, owned by governments and utilities, is not insured, so damage to it, however severe, does not impact the insurance market directly. Also consider that most of Sandy’s worst damage was from wave action, storm surge and flooding. By now it’s pretty well understood that standard property policies do not cover flood loss; most flood damage, if it is insured at all, is covered by policies from the National Flood Insurance Program (NFIP). It appears only a small part of Sandy’s flood damage was insured outside of the NFIP.
There was of course a considerable amount of insured wind and other damage. Of the damage to privately owned (and insured) property, the larger portion of it was to personal property, homes, vehicles, boats and such. The insurance business is divided into personal insurance and commercial insurance segments. A severe loss, as with Sandy, to the personal lines part of the industry will have relatively small spill over effect on the commercial insurance side of the industry.
While total Sandy losses are certainly severe estimates of insured losses are currently running between $12 and $25 billion, only a fraction of the estimated total cost of damages from the storm that are being reported. Of that, most of the loss will be in personal lines of insurance, not commercial. So, all hype aside, how will Sandy affect your commercial insurance premiums in 2013? Succinctly, probably not all that much.
Insurance companies fund for catastrophe losses; they expect a certain number of major events each year, and build the assumption they’ll have to pay for them into their premium calculations. By industry definition a catastrophe is an event that results in more than $25 million in insured losses affecting many policyholders and insurers at once. Here in the U.S. we are prone to suffer such events as hurricanes, tornados, wildfires, and to a lesser extent (from an insured loss perspective) winter storms and blizzards, floods and earthquakes.
Over the past couple of decades total insured catastrophe losses have average around $10 billion annually. That experience fluctuates from year to year. Most recently 2009 and 2010 both ranked well below average for catastrophe losses; 2011 was poor, but up until Sandy 2012 was on track to be another good year. Industry analysts are reporting that insured losses (not counting NFIP flood losses) from Sandy would have to hit $50 billion before impacting insurance industry capital; so far we seem to be nowhere near that number. Even if insured losses come in at the higher end of current estimates, average total catastrophe losses for the recent past are still within norms.
The major impact from Sandy will be on the NFIP. Reports are that the NFIP will run out of money to pay for Sandy flood claims. Expect to see reports that they ask Congress for an increase in their borrowing authority so they can pay their claims. Otherwise, property insurance in general will likely see an impact from Sandy; homeowners insurance costs will certainly continue to rise, and underwriters will be taking a closer look at commercial property lines, continuing an already developing trend.