Editor’s Note: Preparing for Worse

December 4, 2005

Florida has survived eight hurricanes in 15 months, but more destruction is coming, according to risk modeling companies and economists who spoke at the recent National Catastrophe Insurance Summit. It’s just a matter of time, said the speakers, who forecast scenarios from hurricanes, earthquakes and terrorism.

Karen Clark of AIR Worldwide described the potential impact of a major hurricane in New York. The 1938 Great New England Hurricane was one of the most destructive storms ever to hit the Northeast. Thousands of buildings were destroyed, and some coastal communities disappeared entirely.

That hurricane struck the Long Island Sound but reached 150 miles inland up to Canada and Massachusetts. If a similar category three storm makes landfall in a more populated area, say just east of New York City, it would result in approximately $50 billion of insured losses with total economic losses exceeding $100 billion, according to Clark.

Additionally, 3 million people would be forced to evacuate low-lying coastal areas, and major bridges and ferries would be shut down. New York Subway tunnels would flood. Clark forecast it could take up to 18 hours to evacuate the first million people from the area.

And that’s not a worst case scenario.

AIR forecasts a loss equal to or greater than that of Hurricane Katrina has approximately a 5 percent annual probability for the United States.

In examining earthquakes, Dennis Kuzak of EQECAT Inc. described the New Madrid Earthquake that struck the Midwest in Missouri between 1811 and 1812. That earthquake created new lakes and changed the course of the Mississippi river.

If a similar earthquake struck today, estimated damages would likely exceed $300 billion, with only a fraction covered by insurance. Only 15 percent of California homeowners have earthquake insurance. Plus, there would be an estimated $4 billion to $6 billion in workers’ comp from people in buildings, Kuzak said.

In discussing terrorism-related disasters, Hemant Shah of Risk Management Solutions (RMS) said a nuclear explosion in the Port of Long Beach, Calif., would destroy one of the world’s busiest ports and immediate surroundings.

A lot of manufacturing would have to be shut down. Food would be unable to get in and out of ports. Not only would all ships need to be inspected, halting shipments of goods, but consumer confidence would plummet.

“There would be a crash of the financial markets that doesn’t occur after a hurricane or earthquake,” Shah said. “That would hurt insurance companies too.”

A 10-day labor dispute in 2002 on the West Coast caused $2 billion per day in economic losses, according to Shah. “Even if it’s just a threat of a terrorist attack … the economy would still suffer,” he said.

The National Catastrophe Insurance Summit brought insurance regulators, insurance industry representatives, risk modeling firms and lawmakers together to develop a plan to manage disasters. The message was clear: As damaging as Hurricane Katrina was, the country needs to prepare for much worse.

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