Jeff Waters (pictured) is senior manager and meteorologist at catastrophe modeler Risk Management Solutions.
Superstorm Sandy is the second costliest landfalling U.S. storm on record, and ranks as one of the most destructive events in U.S. history. The storm, which was almost the size of Alaska, brought hurricane-force winds, rain, and catastrophic storm surge to the Mid-Atlantic and Northeast, in addition to significant snowfall to parts of Appalachia and the Midwest. Thousands of flights were cancelled, and power outages that were reported in 15 states impacted almost 8.5 million homeowners and businesses, and caused severe business interruption and contingent business interruption.
Sandy, like Hurricane Katrina and Hurricane Ike before it, have emphasized the potential risk that coastal flooding poses to the insurance industry. It drives the majority of U.S. flood tail risk, which impacts key risk management and rate filing decisions, from capital management to risk transfer. These storms have also highlighted that surge-driven damage can drive a large proportion of the total insured losses – sometimes exceeding the wind damage losses. Sandy's greatest damage impact was from coastal flooding, which accounted for 65 percent of Sandy's total insured losses.
Using its U.S. North Atlantic Hurricane Model, RMS estimates that each year there is an 18 percent chance that a landfalling U.S. hurricane will cause coastal flood losses that exceed the wind losses – this probability nearly doubles along the Northeast coast. The RMS model also indicates that there is a 32 percent chance that annual U.S. insured coastal flood losses will exceed $1 billion, and a 16 percent chance that they will exceed $5 billion.
One of the biggest sources of loss uncertainty for Sandy continues to be how business interruption claims are ultimately settled. Although 93 percent of claims filed by businesses and homeowners were closed within six months of the storm, the remaining claims are expected to take more than a year to fully resolve. Unlike windstorm claims, business interruption costs can escalate independent of structural damage, because the damage caused by the floodwaters prevent the occupants from returning to their buildings.
RMS conducted research during Sandy that revealed that flood losses from commercial and industrial structures might only be partially covered. This is due either to incomplete take-up of insurance, i.e. less than 100 percent of locations having flood coverage, or because of the common use of flood sub-limits and separate attachment points. RMS research also revealed that claims severity is different in areas where wind and coastal flood interact.
Modeling Storm Surge
Traditional approaches that attempt to predict surge magnitude based only on the storms' landfalling intensity have been known to underestimate the impacts of coastal flooding from surge. Sandy highlighted the limitations associated with lower-resolution data and aggregate modeling at ZIP-code level. Using coarser resolution input data to model a high-resolution hazard, like coastal flooding, yields less accurate results, with increased uncertainty surrounding loss estimates.
This is because localized surge impacts are not captured as accurately. As a result, coastal flood hazard and loss estimates often become more simplified and volatile as they are aggregated to represent larger areas. The street-by-street pattern of flooding in Manhattan and along the New Jersey coast – two areas where flooding closely follows small-scale changes in topography – highlighted the value of data intensive modeling to enable accurate underwriting and assess flood loss.
The scale of coastal flood damage caused by Sandy continues to emphasize the need for catastrophe models that have physical coastal flood modeling capabilities that are linked to full life-cycle storm simulations. This type of advanced storm surge modeling that uses high-resolution geospatial data to simulate the impacts of wind-driven water in a hurricane system on coastal regions is necessary to be to enable (re)insurers develop a more accurate view of the storm surge risk and make sounder underwriting decisions.
Regardless of when or where the next major coastal flood event occurs the risks associated with coastal flood have been heightened by Sandy, Katrina, and Ike. As such, the industry needs to have the right tools available in order to model the magnitude and severity of catastrophic storm surge accurately. But these models need to be transparent and openly reflect where material uncertainties remain, allowing customizable views of surge risk that enable the industry to explore the risk. Only through models like this, combined with high-resolution data, will the industry's insight into coastal flood risk improve and ensure that the next Sandy is not a surprise when it hits.
Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader
Your access to unlimited PropertyCasualty360 content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Breaking insurance news and analysis, on-site and via our newsletters and custom alerts
- Weekly Insurance Speak podcast featuring exclusive interviews with industry leaders
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the employee benefits and financial advisory markets on our other ALM sites, BenefitsPRO and ThinkAdvisor
Already have an account? Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
