New Orleans Flood Adds $15-$25B in Hurricane Katrina Insured Losses; Total Estimated Losses Rises to $40-$60B

September 9, 2005

Risk Management Solutions now estimates that insured losses from Hurricane Katrina are expected to be $40-$60 billion, of which $15-$25 billion are related to the Great New Orleans Flood.

Total economic losses may now exceed $125 billion.

On Sept. 2, RMS released a preliminary insured loss estimate of $20-$35 billion (excluding flood losses in New Orleans). At that time, total economic losses were estimated at over $100 billion. RMS says that today’s revised estimates reflect an extensive analysis the risk modeling company performed to estimate the insured and uninsured loss components of the flood.

Standard commercial and residential policies issued by private insurers cover wind damage, but flood is excluded. Businesses and homeowners can obtain coverage with fixed limits through the National Flood Insurance Program (NFIP). Private sector insurers also offer coverage in excess of the limits provided by the NFIP, which is commonly purchased for high-value commercial properties or homes.

Katrina’s eye passed to the east of New Orleans on the morning of Aug. 29, and there was little time to assess wind damage before the levees broke and flooding began. Distinguishing the portion of damage attributable to wind or flood will be difficult in many areas that were impacted by winds in excess of 100mph. The final insured loss from Hurricane Katrina will depend on how flood claims are apportioned among the NFIP, private insurers, and individuals. Insurers can also expect deterioration losses in houses that are abandoned for a long period of time, and losses from fires and looting in the flooded city.

At least 50 percent of the total economic loss resulting from the effects of Hurricane Katrina can be expected to come from the Great New Orleans Flood.

According to the Army Corps of Engineers, the floodwaters in New Orleans are receding at a rate of four to six inches per day, but approximately 60 percent of the city remains inundated. Due to extensive power outages, only about 25 percent of the pumps in the local parishes are currently operational. It could take months to drain the water and fully assess the level of structural damage, as well as the contamination in the soil and ground water.

Economic losses from business interruption and displacement of residents are highly dependent on the duration of the flooding and resulting contamination.

“This is the first urban flood that has affected such a vast and industrialized region. Without benchmarks, authorities have little experience to inform them of the levels of contamination to expect once the waters recede, or how long it will take before the region can be inhabited again,” commented RMS Vice President Laurie Johnson, who leads the company’s post-catastrophe response and reconnaissance. “Ultimately, public safety concerns will determine when businesses can reopen and residents are allowed to return, even in areas that appear to be undamaged.”

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