August 31, 2015 by Canadian Underwriter
Ten years after Hurricane Katrina – the most costly natural disaster ever faced by the insurance industry and one of the most powerful storms to strike the United States Gulf Coast – the risk of catastrophic storm surge remains, according to a new report from catastrophe modelling firm AIR Worldwide.
The Katrina 2015 report models two scenarios for Hurricane Katrina’s landfalls along the Gulf Coast with today’s exposure: the first with catastrophic failure in the flood defence system, the second with the new flood defences holding. The modelled results are enabled by the new hydrodynamic storm surge component of the U.S. hurricane model, which explicitly accounts for the current New Orleans flood protection system and probabilistic failure scenarios for the system, AIR Worldwide said in a statement on Monday. [click image below to enlarge]
Katrina was a landmark event that provoked a new awareness in risk estimation and risk management, with numerous implications for the insurance and reinsurance industries – as well as for catastrophe modellers, the statement said. Property Claims Services (PCS) estimated total insured payouts at more than US$41 billion in six states – Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee. Payouts for Louisiana and Mississippi, the most heavily damaged states, were pegged at US$25.4 billion and US$13.8 billion, respectively. According to PCS, more than 1.7 million claims were filed: almost a million from Louisiana and a half million from Mississippi.
“The storm redefined the concept of a modern devastating natural catastrophe, not only as a result of the physical damage from wind and water, but also because of the complexity of the insurance issues that arose, including claims handling, demand surge, and flood insurance coverage,” said Dr. Sylvie Lorsolo, scientist at AIR Worldwide, in the statement. “Moreover, Katrina highlighted the effects of a large system-level failure, led to enhanced focus on the quality of exposure data, and increased the focus on business interruption and contingent business interruption exposures, all of which have spurred advances in the science of modelling wind and storm surge.”
The report noted that a lot has changed along the vulnerable Gulf Coast since Hurricane Katrina. Exposure growth in the Gulf Coast region, as elsewhere, has been limited in the last decade, in part because of the great recession of 2008-2009. In Louisiana and Mississippi, the insured value of coastal property has not increased as much as the insured value of property statewide since the hurricane, but the difference in percent increases is not dramatic. [click image below to enlarge]
“Much has changed along the vulnerable Gulf Coast since Hurricane Katrina devastated the landscape from Southern Louisiana to the Florida Panhandle,” said Dr. Karthik Ramamathan, senior engineer at AIR Worldwide, in the statement. “Although billions have been spent on storm surge defenses in the New Orleans area, the risk of a catastrophic storm surge remains.”
In the first scenario (flood defences fail), the city of New Orleans would once again experience widespread flooding, with infiltration from Lake Pontchartrain from the north, the Intercoastal Waterway from the east, and the Mississippi River from the south. Lakeside neighborhoods and much of the downtown, as well as low-lying neighborhoods east of the river – such as Arabi, Chalmette, Meraux, and Violet – again would be impacted, some quite severely, the report said.
If defences fail, AIR said, surge losses exceed wind losses in Louisiana from an insurable loss perspective. However, insurance coverage for wind far exceeds that from flooding (including storm surge), which is why wind typically dominates from an insured loss perspective. [click image below to enlarge]
The significant growth in coastal exposure in Louisiana and Mississippi in recent years, coupled with subsidence in some of the areas around New Orleans and the high vulnerability of the Louisiana and Mississippi coastlines to storm surge, leads to a US$59 billion insured loss total with flood defences failing. This sum corresponds to a US$105 billion ground-up loss, with Louisiana taking the lion’s share in this overall loss.
In the second scenario (flood defences hold), “the city is largely protected from flooding,” the report said. This scenario leads to a US$46 billion insured loss, with a corresponding US$71 billion ground-up loss. Louisiana continues to suffer the highest losses in this scenario, although with storm surge defenses holding the insured loss total for Louisiana drops 29% from the first scenario – a decrease almost entirely based on the reduction in storm surge damage in the New Orleans area. However, in both scenarios, the loss estimates in coastal Louisiana (outside the city), Mississippi, and other impacted states are very similar.
“This scenario also underscores that wind is still the primary driver of insured loss, regardless of levee failure,” the report said. “Although the flood defence system c
an significantly mitigate storm surge damage in and around New Orleans area, it cannot mitigate wind damage. Attention to wind mitigation strategies remains critical.”