Insurers contemplate climate risks
Increased frequency of devastating events means higher premiums, restricted coverage in effected areas
By Peter Buxbaum, AJOT
On October 29, 2012, Hurricane Sandy made landfall at the New Jersey coast, colliding with a nor'easter to form what has been called a superstorm. The superstorm brought surges of over 11 feet high, killing over 100 people and destroying or damaging thousands of homes. Over 8.5 million customers in New York, New Jersey, and Connecticut, and more elsewhere, were without electricity, some of them for many days. Six-hundred million gallons of water infiltrated transportation systems and roads.
The unloading of the first vessel to call on the Port of Authority of NY/NJ
after it reopened on November 4th.
Hurricane Sandy was the eighteenth named storm of the 2012 hurricane season, and the tenth hurricane. Its tropical-force winds reached out 580 miles, making Sandy was the second-largest Atlantic storm on record. Besides affecting the east coast of the United States, from North Carolina to Maine, Hurricane Sandy was felt as far inland as West Virginia, Ohio, and Indiana. Damage estimates reach into the tens of billions of dollars.
As the storm approached the New York area, the port of New York and New Jersey closed on October 28 and didn't reopen until November 4. Port Newark Container Terminal, Port Elizabeth Marine Terminal, Port Jersey Marine Terminal, Howland Hook Marine Terminal on Staten Island and the Brooklyn-Port Authority Marine Terminal were all shuttered during that interval. Deep draft vessels departed the terminals and headed to sea in advance of the storm while the Port Authority provided a safe berth for many barges, dredges and floating cranes. On October 29, all port properties were evacuated.
The Elizabeth Port Authority Marine Terminal reopened for business on November 4, while other terminals, including Port Newark Container Terminal and Global Terminal in Jersey City, began to do business on November 5 as electrical power was restored to the area.
The port has faced unprecedented challenges as a result of Superstorm Sandy. The storm surge pushed nearly four feet of water throughout the port, while hundreds of shipping containers were displaced and rail lines and electrical systems were damaged.
It was only a few years ago, in 2005, that hurricanes Katrina and Rita devastated the Gulf Coast. Since these catastrophic storms, by their very nature, attack primarily coastal areas, at least in the first instance, the question arises about how the frequency of such storms impact maritime activity, and, by extension, marine catastrophic insurance rates and coverage. The insurance industry doesn't grapple with the issue of climate change as such, but does endeavor to model the chances of sustaining losses by geography and other criteria so that its coverage and rates are appropriate to the risks involved.
"Sandy had an enormous impact on maritime commerce in the New York-New Jersey area," said Michael Brown, executive vice president at Avalon Risk Management, an insurance brokerage in Salem, Mass. "Not only were area businesses engaged in maritime transportation affected by the flooding, power failures and wind damage but supply chains of companies elsewhere were impacted when shipments were damaged, destroyed or delayed. Because a large number of ocean shipments transit through transportation corridors like New York/New Jersey, an event impacting an area like this can have far reaching consequences. We could just as easily be talking about a major earthquake that caused severe damage to the ports of Los Angeles and Long Beach."
Estimates of total insured losses from Sandy are still somewhat fluid, according to Brown. "Estimates now range from $15 million to 25 billion dollars," he said, "making Sandy the second costliest storm for the insurance industry after Hurricane Katrina. Those estimates are up from $5 billion to $10 million dollars a month ago. It has taken time for some businesses to even be able to re-enter their facilities and take stock of the losses that they may have had so that they can submit claims." The total losses from the storm will be significantly higher, Brown noted, because some individuals and businesses choose not to purchase insurance and therefore won't be making claims.
It is also interesting to note that a number of different types of insurance will respond and provide coverage, from flood insurance to auto insurance to marine insurance. "Additionally," said Brown, "many companies did not experience direct damage losses from the storm, but nevertheless, were financially impacted when they were unable to operate in the wake of the storm or had to seek temporary space. Business income and extra expense coverage comes into play when this occurs, but coverage may not apply when losses result from flooding."
"The frequency of natural events, especially over the last ten years, have naturally captured the interest of the insurance industry," said Dan Negron, senior underwriter at Thomas Miller & Co. in Jersey City, N.J. "The industry has tried to account for this increase by modeling and anticipating where catastrophic events might occur and to structure coverage accordingly."
Even before Hurricane Katrina laid New Orleans to waste, the insurance industry tracked and modeled regional phenomena in an effort to develop patters and frequencies of serious climatic and other natural events, noted Negron. "The Caribbean and the Yucatan in Mexico have been known for their frequency of windstorms," he said. "Some insurance carriers have not been insuring hurricane risks in the Caribbean and Central America for the last 15 years. The industry is going to look at the northeast and its frequency of flood events and will act more cautiously when writing coverage."
Insurance carriers can account for the greater perceived risk from natural disasters in two ways: by raising rates or by imposing restrictions on coverage. But market forces, including developments in the reinsurance market, ultimately dictate coverages and rates.
"Insurance coverage is a commodity," said Negron. "There is only so much of it on the planet and as a result its price fluctuates based on on supply and demand. When there is more capacity, the price goes down and vice versa." However, although premiums have tended to be soft over last seven to eight years, the availability of insurance in areas prone to catastrophic natural events tend to be limited, thereby driving up prices in those areas, Negron added.
Reinsurance companies, which cover some of the risks of insurance carriers, also play an important role in insuring against natural disasters and in influencing the market conditions. "Natural disasters, by their very nature, tend to impact a large number of an insurance company’s policyholders at the same time, potentially creating very large claim aggregations," said Brown. "Reinsurers provide catastrophic loss coverage for insurance companies allowing them to transfer a portion of this risk. While there are many insurers, there is a much smaller number of reinsurers. For this reason, individual reinsurers can be significantly impacted when disasters occur."
For the same reason, reinsurers have a strong impact on rates in the insurance market. "Reinsurance drives catastrophic risk rates," said Negron. "After a disaster, insurers going back into the reinsurance market will likely see less available capacity or a reluctance to write coverage. That leads to higher rates in the insurance market, particularly in areas prone to catastrophic events."
The marine insurance industry is very resilient, noted Brown, but rates have been very competitive for a long time despite rising claims. "For this reason, large loss events like Sandy can definitely put upward pressure on rates," he said. "This is especially true when multiple significant losses occur within a short time of one another. Some insurers may also seek to reduce the number of policies they write in certain areas. There are already insurers that will not underwrite offices and warehouses within several miles of the coast. This is a particular concern for the international transportation industry as most facilities are, in fact, located either by seaports or airports."
Many of Avalon Risk Management's clients have experienced substantial losses, "not only to cargo," said Brown, "but also to their offices, warehouses, business personal property, and company vehicles. We are assisting our customers by processing and managing claims. Our own New York office is in a building that was severely flooded. Our building is still without critical systems and cannot be occupied so, like many of our clients, we continue to operate from temporary space."
Both Negron and Brown agree that the insurance industry doesn't need to confront the politically fraught issue of climate change as such in order to be prepared for future natural events. "It's a questions of modeling what has happened historically," said Negron, "in order to develop patterns and tendencies."
"While there is disagreement as to whether recent increases in average temperatures are a result of global warming or a part of natural temperature cycles that the earth has experienced for millennia," said Brown, "what is certainly true is that the Atlantic has experienced a high number of named storms in eight of the last ten years. While the number of major hurricanes in recent years, 2005 aside, has not been as high as in some past periods, Katrina and Sandy demonstrate that just one large storm can be devastating and we need to be prepared."