On October 29 last year Sandy swept through the north-east, leaving widespread devastation in its wake. It was the defining catastrophe event of 2012.
The losses caused by Sandy were substantial. Yet what is perhaps surprising is that wind speeds were not particularly high. By the time it made landfall Sandy was not even categorized as a hurricane so the severity of loss was to some extent unusual for a tropical storm.
“The severity of the loss in the region was not a surprise but the type of loss and the way the loss rolled out was surprising,” Tom Larsen, senior vice-president and product architect at risk modelling firm Eqecat, tells Reactions. “The proportion of property to flood was about 50/50 and that was unusual.”
Sandy caused $18.75bn in property losses, excluding flood insurance claims covered by the federal flood insurance program, making Sandy the third-most-costly US natural catastrophe, according to ISO’s Property Claim Services. Some 1.58m Sandy claims were filed, most of which were homeowners insurance claims. New York took $9.6bn of those losses, followed by New Jersey, with $6.3bn. Pennsylvania had $700m of insured losses, Connecticut had $500m, while other states suffered losses below $500m.
Greg Coda, president of client management in the reinsurance division at Munich Re America, says the losses changed the view of storm surge in the north-east, as well as highlighting the personal lines exposure.
“A lot of the losses came from personal lines automobile comprehensive,” says Coda. “On October 28 2012 we were worried about wind and damage all along the coast line, and we ended up with a tremendous amount of damage on the comprehensive loss on the personal lines for a lot of companies that hitherto hadn’t thought about that loss.”
According to PCS, commercial insurance accounted for $8.93bn of the losses, or 47.6%, personal lines accounted for $7.11bn, or 37.9%, and auto accounted for $2.72bnm or 14.5%.
In addition to these figures, the National Flood Insurance Program had $7.1bn of losses.
Momentum is slowly building towards a privatization of the National Flood Insurance Program. Mike McGavick, CEO of XL Group, believes this is conceptually a good development but he has concerns.
“The fact is the US flood program is not working very well and we can see it in catastrophes, as we saw in Sandy, and we can see it in the argument now going on between the federal government and the states about how to properly improve the program," he told Reactions at the PCI annual meeting last week. "I think in flood as in other situations of that magnitude the federal government has to create the contours of a market within which private companies will come in, innovative and create policies.”
He says the fear is if an economically rational flood program were to be created the regulators would not let the costs be passed onto consumers. He says this is dysfunctional because an artificially priced program cannot meet its obligations and inaccurate pricing signals are sent to market leading to wealth transfer from less cat prone zones to more cat prone zones.
“So we do it inefficiently, we send the wrong message about how much it costs to do these things and then the government expensively picks up the pieces. All illogical,” said McGavick.
Tim Doggett, principal scientist at AIR Worldwide, says Sandy was not an unpredictable storm from a modeling standpoint
“We’ve spent a lot of time with Sandy now and, in a lot of ways, Sandy was the type of event that we had been modeling and the type of event that we have been doing risk analysis for,” he says. “So while there are some unique characteristics and a lot of lessons can be learnt from Sandy it wasn’t something that was so ground shaking that is changing the way that we are doing any of the modeling.”
One of the most striking aspects of Sandy was the wide wind field that accompanied it with the sheer size of the storm surprising observers. But the damage at the core of the storm where winds and flooding was highest was not particularly unusual.
“One of the characteristics was the very broad wind field and that is certainly very challenging to model but the heaviest damage was in the core area of North/Central New Jersey, New York, Long Island and parts of Connecticut.
“What we see is that the winds in that core area were very characteristic of the cyclone as we would model it given the storm parameters that were observed,” says Doggett.
Despite almost a year passing, many businesses are still struggling to come to terms with the event and to get back to where they were before Sandy struck.
“As an insurance person, downtown
“What dwells with me today is that businesses still aren’t right where they need to be.”
One of the images that people associate with Sandy is the mass flooding that took place as a result of the catastrophic storm surge that accompanied the storm. Despite the very public nature of Sandy and the flooding that occurred as a result of the surge, many customers are still hesitant to buy insurance protection.
“There are still a lot of buyers of insurance who don’t buy flood insurance, and I’m speaking from a global perspective, because it costs a little bit more money,” Tobin continues. “I’m not talking about Fortune 100s. The price went up and it became more of a challenge and if you survived Sandy maybe you don’t see the value in it.
“But as an insurance provider, we’re trying to give our clients every opportunity to buy insurance to help them make it through an event like Sandy.”
Like all catastrophe events there were many lessons to take away from Sandy. The storm surge in particular has allowed catastrophe modelers to improve surge and flood models across coastal regions of the US.
Events like Sandy allow models to continually improve and allow for a better education on pricing and risk evaluation. “As a modeler we are continually working on improving our surge model as well as floods and that is a larger part of it,” says Eqecat’s Larsen. “It gets so specific as to can we improve and deliver a model that allows an insurer to evaluate a policy with flood sub limits and the full fire limits from the winds.”