Look out for the next Long Island Express

Environment, Insurance and Reinsurance — By on July 6, 2012 at 2:11 PM

View of New York

Friday 6 Jul 2012 – The chances of a cataclysmic hurricane hitting New York are slim – but that doesn’t mean it isn’t going to happen.

In the 2004 box office smash The Day After Tomorrow, Manhattan is struck by a torrential hurricane that brings with it freezing floods filling the city’s streets with water. Chaos ensues and its hero, Sam, takes refuge in the New York Public Library.

While the movie presented an exaggerated sci-fi scenario, there’s realistic concern that the North Eastern seaboard could one day be hit by a windstorm that creates more damage than 2005’s Hurricane Katrina, an event which cost insurers over $72bn.

A new report from consulting firm CoreLogic points out that while Florida tops the list of states with the highest total number of properties at risk of storm surge, New York ranks second in terms of the total value of coastal properties exposed.

CoreLogic spokesman Dr. Howard Botts says Florida, Louisiana and Texas get the most attention when it comes to windstorms: “But even a Category One storm could cause damage in the billions along the North East Atlantic coast and force major metropolitan areas to shut down or evacuate.” Quite apart from the tragic loss of life, the economic losses of last year’s Hurricane Irene were between $2bn and $6bn.

The CoreLogic report reveals that the ten cities with the highest total potential exposure to storm-surge damage contain over two million properties, with the value of those at risk put at $420 bn. The New York City metropolitan area, including northern New Jersey and Long Island, has both the highest total number of properties and the highest financial exposure of properties at risk, estimated at more than $168bn.

Should a significant windstorm hit the northeast, a key concern will be whether the country’s National Flood Insurance Program would bear the brunt of homeowners’ flood claims, with insurers and reinsurers contributing to the region’s economic recovery by compensating commercial policyholders for property damage and the related disruption.

Being one of the biggest reinsurers of wind damage, Lloyd’s would play a critical role if this situation were to occur. Lloyd’s head of exposure management, Trevor Maynard, says that a hurricane’s energy usually dissipates over the colder waters of the north.

“The probability of a powerful windstorm hitting the North East coast is lower than for Florida or the Gulf, ” Maynard says. “But a fast moving hurricane can retain its energy up into the North East Atlantic coast – as happened in 1938 with a windstorm that became known as the Long Island Express.”

That ‘Category Three’ hurricane devastated Long Island and New England, with losses estimated at over $40bn in today’s prices. Maynard believes that there is enough probability for a repeat of the Long Island Express to be a very real concern, especially given the potential trend for higher sea surface temperatures. Maynard added, “That’s why one of Lloyd’s compulsory Realistic Disaster Scenarios, used to stress test the market, suggests a $78bn insurance industry property loss resulting from a North East windstorm event.”

Although final claims costs and talks of catastrophe modelling didn’t make it into the screenplay of The Day After Tomorrow, being able to predict and plan for a Northeast windstorm event is an important and realistic element to the story for insurers and reinsurers.

(source: Lloyd’s of London)

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