Sandy: expected event,
unexpected consequences
Superstorm Sandy shows how the
influence of uncertainty can
create incalculable consequences
Kevin H Kelley
Ironshore
M
eteorologists, scientists and weather
experts warned of
the magnitude of
what was first considered to make
landfall as a category one hurricane in the days leading up to the
arrival of hurricane Sandy. While
businesses and area residents
along the eastern coastline, in Manhattan and on Long Island braced
for an unprecedented weather
event, the insurance industry was
assessing its aggregate risk exposure. The industry’s long-standing
approach to event risk management focuses on data aggregation,
portfolio exposure assessment,
post-event claims analysis and
future loss mitigation.
Management of weather event
risk using modelling tools and analytics can be most beneficial. Modelling platforms enable insurance
companies to aggregate exposure,
assess measured loss and determine bottom line impact in a worst
case scenario. Eventual outcomes
of catastrophic weather events,
however, are ultimately determined by the uniqueness or specific “DNA” of the named storm.
Sandy presented its own set of challenges, resulting in unexpected
industry consequences. The most
surprising industry dynamic in the
post-Sandy environment was the
absence of market dislocation.
Two unknown factors that test
theindustry’sapproachtoriskmanagement are human behaviour and
increasing uncertainty. Sandy triggered both, neither of which could
have been quantified, modelled or
interpreted at the outset.
Almost immediately, the insurance industry found itself in a
quagmire as controversy erupted
as to whether Sandy was a “wind”
event or a “flood” event. Political
influencers weighed in to protect
their constituents, while the Federal Emergency Management
Agency was struggling with accommodating the severity of loss to
individual property owners and
displaced families in communities
reaching from the New Jersey
coastline to the Long Island Sound.
Outdated building codes for commercial buildings in Lower Manhattan allowed for underground
electrical infrastructure despite
the area being a designated flood
zone. Businesses and residential
properties congregating the coastline, whether new or aged construction, were not built to
withstand the impact of Sandy’s
wrath. Public transportation was
interrupted and a return to daily
normality remained an uncertainty. New Jersey Transit, for
example, relocated trains from one
flood zone area to another yard,
subsequently labelled a floodprone area following damage to
inoperable passenger trains.
Complications
The New Jersey coastline presented geographic complications.
Of the more than 15 million coastal
homes in the world, one-third are
located in the US. The vast majority
of coastal homes are situated along
the Eastern Seaboard and
equipped to withstand historical
experience of wind events. Concentration of high-value properties, which typically cannot be
modelled effectively, creates
heightened exposure for insurance
companies as resultant losses can
be underestimated. While wind
risk models perform reasonably
Waterfront homes damaged
by storm surge from Sandy
in Mantoloking, New Jersey
well, characteristics of storms such
as Sandy pose greater vulnerability
in the outcomes of those models.
Sandy, however, was a flood or
“water-pushing” event, much like
hurricane Karina, but aggravated
by severe cold fronts and inopportune weather conditions, including
a full moon at high tide. Storm
surge, combined with the other
event perils, caused severe property damage to homes and businesses along Sandy’s destructive
path. Coastline communities were
wiped out, with families still displaced almost two years after the
event, and Lower Manhattan was
virtually out of business for
months. At the height of the storm,
Battery Park surge level reached
nearly 14 ft, surpassing the old
record of 10 ft set in 1960. The New
York Harbour’s surf measured
record 32.5 ft waves, 6 ft higher
than the 25 ft level recorded for
hurricane Irene in 2011.
The largest percentage of insured
losses for commercial and residential properties resulted from water
flooding triggered by the storm
surge. While water generally creates more damage than wind, flooding tends to be a peril specific to the
characteristic of the storm. Not surprisingly, storm surge models can
be the weakest for data and loss
analysis because of the variability
of a storm’s DNA and surrounding
weather conditions.
Post-event supply of construction resources was insufficient to
facilitate the demand for rebuilding efforts, which raised the costs
of professional services and materials above pre-storm levels. The
enormity and unpredictability of
Sandy’s strength prompted widespread power outages throughout New Jersey, most of
Manhattan and surrounding boroughs, Long Island and areas of
Connecticut. Thousands of homes
and businesses suffered without
heat, electricity, and water for up
to three weeks after the storm.
More than 70% of claims filed
with private insurance companies for insured losses were from
homeowners.
Prudent risk management
requires attention to mitigation for
prevention of future loss. In the
months following the event, institutions and public entities produced
numerous
proposals,
studies and reports as visionary
solutions against another massive
storm surge occurrence.
Coastal flood models to calculate
potential storm surge loss and precise flooding patterns
continue evolving to chart new
realities spotlighted by Sandy’s
damage
scenario.
Ironically,
risk-mitigation efforts regarding
storm surge and flood controls
stalled as the sense of urgency
faded with time.
No dislocation
Lack of market dislocation contributed to the collective distraction
from future loss mitigation. The
insurance industry shouldered the
insured losses from Sandy’s
impact, which was the third-costliest hurricane in US history. Total
insured losses exceeded $25bn, of
which 75% was covered by private
insurance companies. Access to
excess market capacity reflects the
resounding health of the industry
as a whole following a depressed
economic period. While some commercial
policyholders
that
incurred significant losses did
experience upward rate pressure
at renewal, there was little industry
wide post-event price adjustment.
Superstorm Sandy was an event
anomaly. The insurance industry’s
approach to risk management of
weather events was minimalised by
available capacity for claims payment and waning interest in future
loss mitigation against coastal exposure to mega-storm destruction.
Superstorm Sandy is a testament
to how the confluence of factors
surrounding a severe weather
event can be calculated and modelled with a certain degree of aggregate accuracy at the outset, yet the
influence of uncertainty can create
incalculable consequences. n
Kevin H Kelley is chief executive
of Ironshore