From an insurance market perspective, the winds from the storm in the Northeast U.S. have been taken into account in the CAT models; it was already priced in. The storm surge was several feet higher than expected by forecasters, and it is yet to be seen what impact that surge will have on claims.
Hurricane Ike in 2008 blew into inland areas that were not priced into CAT model calculations, taking insurers by surprise. Hurricane Sandy, however deadly it may be, does not seem to fit the same category at this early stage. We will be monitoring it closely as will insurers and CAT modelers.
The London market has been busy finalising October 31 and November 1 renewals as the immediate priority for its clients but Sandy has certainly awakened the market.
We have spoken to a number of lead Lloyd’s syndicates and most will continue to assess the situation while monitoring their aggregates. We, and they, will know more by the end of the week.
Each event comes with its own quirks, unknowns and un-modeled quantifiers. In my experience, however, when tragic events like this occur, it calls for a calm and measured response.
We think at this stage (and if comparisons are to be made with Katrina) that the flooding will be the key indicator as to what ultimately determines the final “number.” The power outage and the utility sector in its entirety will suffer further with ingress/egress (business interruption) will be key factors. Until loss adjusters get access to properties, however, the inevitable policy limitations and health and safety rules will make it difficult to assess the situation on the ground.
Since this is going to be a major business interruption loss there will be a lot of “claims creep” involved.
To take the last flood in Thailand as an example, much of the Thai flood’s loss creep witnessed was probably due to over-optimistic initial assumptions on potential recovery times for business interruption (BI) claims. It emerged then that on close investigation many initial claims reserves were based on business interruption periods of six months. If flood waters remain for longer than initially expected, it would not be a surprise if claims develop.
The greatest impact of the storm surge may be intangible and come down to perceptions, the psychological impact of the storm. The multi-media interest and reporting may have a long-term impact on insurance pricing and market sentiment but in terms of quantum this is almost impossible to assess at this point.
In terms of shorter term insurance rating considerations, there had been a sense that the end of this year was going to see possible slight reductions in US-domiciled property insurance rate but these nominal falls may now be revised upwards.
Despite the fact this is the first major U.S. property event since Hurricane Katrina seven years ago, we currently see London and European insurers operating in a “business as usual” mode.
From an international insurance market perspective, the sense we get from our market conversations is that this is not a market changing event. However it may jolt reinsurers into reconsidering their rates at January renewals, so the timing of the storm may be significant. Engineering reports and data about properties continues to be a vital element in telling your company’s story to underwriters. This storm will reinforce their requirements for information to model your risks.
Lockton is already receiving enquiries in readiness for the potential cancellations and reduction of capacity provided by some markets in the wake of the storm.
For more information contact Lockton North American property team by emailing firstname.lastname@example.org.