Hurricane Sandy and its Financial Impact
Damage from Hurricane Sandy is far from fully tallied but a disaster-modeling firm, Eqecat, estimates that total economic damage from Hurricane Sandy could reach as high as $50 billion. If the firm is correct, the storm will be one of the five costliest U.S. hurricanes in history. It is projected that $20 billion of the estimate will be from lost economic activity and the other $30 billion will be property damage related. Some economists have suggested that the storm could shave a half percentage point off the nation’s economic growth in the current quarter. The property and casualty insurance industry is expected to only pay out about half of the property damage caused by Hurricane Sandy. A substantial share will not be picked up by the insurance industry because standard homeowners’ policies do not cover flood damage.
The property and casualty insurance industry is well equipped to absorb the losses from Hurricane Sandy due to the absence of any major catastrophes in 2012. In addition, they have padded their balance sheets due to higher premiums and deductibles and have stopped offering policies in areas that are especially prone to hurricanes. The industry will still face significant costs due to wind related claims, certain flood related claims because most commercial policies provide flood coverage, business interruption claims and automobile claims that provide for flood coverage but ultimately, the industry is expected to be largely unscathed by Hurricane Sandy.
The National Flood Insurance Program (NFIP), which is administered by the Federal Emergency Management Agency (FEMA), is expected to pay for billions in property damage. The Consumer Federation of America estimates that flood claims paid by the NFIP will be between $8 billion and $10 billion. Historically, lenders have mandated the coverage for properties in areas that are deemed at high risk of flooding but premiums were set below the true cost of coverage and many policy holders let their insurance lapse. The policies are available nationwide and approximately 5.6 million people have federal flood insurance policies. There are approximately 450,000 policies held by homeowners and businesses in Connecticut, New York and New Jersey covering approximately $45 billion in property values. The NFIP has become financially challenged after borrowing billions of dollars to pay for claims in recent years, including $16 billion in claims relating to Hurricane Katrina. The program is able to borrow roughly $4 billion more from the Treasury to pay claims before it reaches a cap of nearly $21 billion. FEMA is authorized to borrow up to $500,000 with an additional $1 billion available with Presidential approval. Unfortunately, these borrowings will be insufficient to pay all flood claims related to Hurricane Sandy and many people will likely see their claims denied or will received checks for less than they expected.
In July of this year, Congress reauthorized the program for five years and included reforms such as establishing a reserve fund, phasing out subsidized insurance for second homes and repeatedly flooded properties and a phased-in premium increase. The program was also authorized for the first time to buy reinsurance from private companies but it remains to be seen if the NFIP is a sustainable program in the aftermath of Hurricane Sandy. Until the future of the program is determined, homeowners in high risk areas are recommended to secure coverage under the NFIP while it is still available.