Industry losses from Sandy would need to reach $50 billion in order to materially erode reinsurers’ capital base, according to a Standard & Poor’s analysis.
While most current estimates fall at or below $20 billion, S&P says there is still much uncertainty. For example, the ratings agency says some market participants believe loss amounts could be 30-50 percent higher than estimated due to insurers’ inability to enforce hurricane deductibles in some states.
Additionally, S&P believes the wind versus water debates prevalent after Hurricane Katrina will re-emerge in Sandy’s wake. “When major hurricanes hit the coast, it is difficult to determine whether wind or water caused the damage,” S&P says. “This uncertainty as to whether private insurers, the government, or the insured parties themselves are liable for the damage may result in costly and time-consuming litigation, as happened in 2005.
And even when it’s sorted out, S&P notes that insureds could purchase endorsements to their commercial policies that would cover flood. Adding to the uncertainty, S&P says, “The number of commercial properties affected by Hurricane Sandy with some type of flood coverage is not certain.”
The storm itself adds to the confusion. S&P says the “unique interaction of multiple storms and meteorological phenomena implies that this so-called ‘perfect storm’ is an extremely rare event, and thus challenging for agencies to model accurately.
Other unique features of Sandy-caused losses include the widespread power outages it caused, the explosion of a ConEdison plant in New York, and the disruption of the transportation infrastructure in New York.
Still, even with the uncertainty, S&P believes that the reinsurance sector’s “strong capital and very strong earnings thus far in 2012 will allow it to withstand losses well outside the range of current estimates.”
The ratings agency adds, though, that some reinsurers may have more capital exposed to an event like Sandy than others, “and some have a smaller cushion before their capital begins to erode.”