Katrina: Devastation on the Gulf Coast

The Environmental Protection Agency temporarily has waived standards for gasoline and diesel fuels in Louisiana, Mississippi, Alabama, and Florida under the Clean Air Act, and waivers also have been sent to the governors of the 46 remaining states and territories providing temporary relief from volatility and sulfur standards. These waivers will ensure that fuel is available throughout the country to address public health issues and emergency vehicle supply needs. Department of Energy Secretary Samuel Bodman also has authorized the release of oil from the Strategic Petroleum Reserve.

Health and Human Services Secretary Mike Leavitt declared a public health emergency for Louisiana, Mississippi, Florida, and Alabama, allowing the department to waive certain Medicare, Medicaid, State Child Health Insurance Program, and HIPAA requirements, as well as to make grants and enter into contracts more expeditiously during the emergency. HHS also has established a network of medical shelters and beds nationwide to treat patients.

The Department of Transportation is working with state and local authorities, federal partners, and private sector transportation service providers to assess damage to transportation infrastructures and assist in immediate recovery efforts.

The Internal Revenue Service announced special relief for taxpayers in the Presidential Disaster Areas struck by the hurricane. These taxpayers will have until Oct. 31 to file tax returns and submit tax payments. The IRS will stop interest and any late filing or late payment penalties that would otherwise apply. This relief includes the Sept. 15 due date for estimated taxes and for calendar-year corporate returns with automatic extensions.

Energy Industry Affected

After the monumental task of rescuing the survivors and ensuring that their safety is complete, it will be time to assess the damages caused by Katrina. For the energy industry, the impact is already being seen in this country and in other parts of the world. "With [Katrina's] passage over the offshore platform field in the Mississippi Delta region as a Cat 5, this could be the largest hurricane loss the offshore energy market has ever sustained," said Kyle Beatty, a meteorologist with Risk Management Solutions.

Chertoff noted that, currently, five oil rigs from West Delta Platform are missing, one submersible rig is grounded, two mobile offshore drilling units are adrift, and two semi-submersibles are listing. The damage will affect not only prices in the United States. Citing Katrina, German Economy Minister Wolfgang Clement placed partial blame on the United States for record oil prices, according to an Aug. 31 Reuters article, written by Dave Graham. Clement said that damage to U.S. refining capacity caused by the storm would cause the U.S. to buy more oil in Europe, which would inflate prices.

"On this I must say the United States has had insufficient refining capacity for a long time, and this is presumably now impaired, so the situation is coming to a head," he said. "It's a U.S. problem, a problem with American policy. It's to do with American planning rights which lead to yield expectations in investments' in the sector not being high enough. I hope the American government reacts differently to this."

Loss Estimates

I.I.I. called Katrina "the worst natural disaster the insurance industry has ever handled." The storm exceeds last year's series of Florida hurricanes in scope, magnitude, and complexity, because, "the number of anticipated claims from Hurricane Katrina will exceed the previous record of two million claims received from the four Florida storms last year," according to the institute.

Additionally, I.I.I. said that the losses for Katrina cover large portions of three states, whereas the Florida storms generally were restricted to a single state. Katrina also caused catastrophic damage to the infrastructure of New Orleans. No major metropolitan areas saw significant damage from the Florida storms.

"The final tally of insured losses will be surpassed by total economic losses to the region: tourism losses; cost of repairs to roads, bridges, levees, and water and sewer systems; lost income of people whose place of employment has closed, etc.," I.I.I. noted.

Katrina could cost the insurance industry between $17 and $25 billion, AIR Worldwide estimated, making the hurricane the most costly natural catastrophe in U.S. history, surpassing the $15.5 billion of insured losses from Hurricane Andrew in 1992. According to AIR, Katrina made landfall about 60 miles southeast of New Orleans near Buras, La., with maximum sustained winds reaching 145 miles per hour.

"Katrina was very large for a Category 4 hurricane," said Jayanta Guin, AIR's vice president of research and modeling. "Katrina's hurricane-strength winds extended more than 120 miles from the center of the storm, from near Baton Rouge, La., to east of Mobile, Ala., and over 200 miles inland.

"Many have been asking why this storm is so much worse than Hurricane Camille in 1969," Guin added. "Camille was an even more intense hurricane than Katrina. However, it was a very tightly wound storm with its strongest winds extending just nine miles from the center, compared with approximately 30 miles for Katrina. Hurricane Katrina impacted an area more than twice that affected by Camille."

The vulnerability of the building stock in the region also factored into AIR's insured loss estimate for Katrina, Guin explained. "Building standards in the Gulf coast region are not as stringent as other hurricane-prone regions, such as southern Florida," Guin said. "We expect this contributed to increased wind damage to properties."

After a preliminary estimate of $10 to $25 billion in total private sector insured losses from Katrina, RMS revised its estimate to $40 to $60 billion, based on losses related to the excessive flooding in New Orleans. "[The] revised estimates reflect an extensive analysis that RMS has performed to model and estimate the insured and uninsured loss components of the flood," RMS stated.

At least 50 percent of the total economic loss resulting from Katrina is expected to come from the flooding. Economic losses from business interruption and displacement of residents will be dependent on the duration of the flooding and resulting contamination, according to RMS.

"This is the first urban flood that has affected such a vast and industrialized region," explained Laurie Johnson, RMS vice president. "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. Ultimately, public safety concerns will determine when businesses can reopen and residents are allowed to return, even in areas that appear to be undamaged."

The German reinsurer, Hannover Re, estimated total insured losses to be around $30 billion. The company said that Katrina is set to become the most expensive natural disaster ever suffered by insurers in industry history. Because of Katrina and other large losses in the third quarter, the company's profit expectation cannot be achieved for this year, Hannover Re noted.

Swiss Re expects its Katrina-related claims to be in the range of $500 million. Its industry-wide estimate was $20 billion. The company said that the complexity of damage caused by the storm and subsequent flooding means that estimates have a greater-than-usual degree of uncertainty.

The Property Casualty Insurers Association of America refrained from offering an estimate, noting that the inability of response teams to gain immediate access to the areas hit hardest by Katrina, combined with the ongoing recovery efforts, make the number of claims likely to be filed uncertain and complicate the ability to calculate and accurately estimate insured losses.

Insurers are reversing the normal procedure followed in the wake of a hurricane, according to PCI. In most post-disaster recovery efforts, insurers attempt to establish their claim settlement centers near those areas hardest hit by the catastrophe so that they can assist those individuals and businesses with the most significant damage and in greatest need of claim payments. In this case, however, it may take several more days for insurers to be allowed access to the storm-ravaged areas of New Orleans, Biloxi, and Mobile, the association stated. Instead, many companies are setting up catastrophe response centers on the fringes of the damaged areas.

In general, most standard homeowners' and business insurance policies cover losses from wind and wind-driven rain, PCI noted. Losses from floods caused by rising waters as a result of overflowing lakes or rivers, however, will not be covered under these policies and, instead, will be covered only if the consumer has purchased a flood insurance policy through the National Flood Insurance Program. Properties in a flood plain, which constitute a significant number of homes and businesses in the affected areas, with a federally backed mortgage must have flood insurance in place as a condition of the mortgage, according to PCI.

As for the industry's ability to respond, "The insurance industry has the financial strength and human resources to pay the claims from Hurricane Katrina," state I.I.I. "We have done it before and we will do it again. All covered losses will be paid fairly and quickly."

Coming Together

As with any catastrophe of this magnitude, the victims require assistance. The insurance industry, the business community, and individuals throughout the country are coming together to do their part in helping those affected by the storm. Insurers have set up toll-free numbers to assist consumers with policy-related questions regarding their coverage for damage caused by Hurricane Katrina.

Many in the industry also have made donations to the American Red Cross, the Salvation Army, and other charities. Additionally, The Hartford intends to provide payment relief to policyholders affected by the storm. The company said that it will continue to insure homeowner, automobile, and commercial insurance customers, even if they temporarily are unable to make their insurance payments. Although premium bills will continue to be issued, policy non-payment cancellations will be temporarily suspended in affected areas of Louisiana, Mississippi, Alabama, and Florida.

The insurance industry is not alone in offering assistance to the victims of Katrina. Among the many businesses and individuals who have offered help is the American Red Cross, which has received donations from many corporations, including Chevron ($5 million), BP Foundation ($1 million), and Target ($1.5 million). The Walt Disney Company also has said that it will make a corporate contribution of $2.5 million to the relief and rebuilding efforts.

The entertainment industry is doing its part. Many celebrities have joined campaigns to raise the awareness of Americans outside the affected areas. In addition, NBC Universal Television Group aired a live benefit special, A Concert for Hurricane Relief, on Sept. 2, which featured performances by artists with ties to the hurricane-hit states. MTV, VH1, and CMT produced a separate fund-raising concert, which took place Sept. 10.

The Red Cross also has stated that, in response to the many people across the Internet who want to help, those who run web sites or blogs can place banners on their sites. The banners, provided by the Red Cross, will help "spread the word about the need for donations." More information is available at www.redcross.org/psa/bannerorder/all.

A Lesson from Europe

In the Netherlands, news of Katrina and of the breaking of the levees that resulted in the severe flooding in New Orleans brought back memories of a disaster that occurred more than 50 years ago. In 1953, a storm caused the sea to breach dikes along the southern coast of the Netherlands, which resulted in more than 1,800 deaths, according to an Associated Press story by Toby Sterling. The Dutch resolved "that their ancient enemy — water — would never kill again," Sterling wrote.

Much of the Netherlands, like New Orleans, lies below sea level, and the threat of a tidal wave or a severe storm is a constant worry. "Rationally, you know it can happen, but you pray it never does," said Peter Dolen, the head of the Interior Ministry's Risk and Crisis Communication Center, in the AP story. "You can draw up any plan you like from behind your desk, but you know it's going to be different in reality."

To decrease the chances of such a disaster, that government launched a massive project to upgrade its ancient system of dikes and dunes. The system includes a "chain of 40-foot-tall steel walls suspended by piers in the open sea," which was completed in the 1980s and cost today's equivalent of $3.1 billion, according to AP. This defense is considered among the world's best against flooding. Today, the Netherlands is spending $3.7 billion on new projects, in addition to the $620 million spent annually on maintaining the current system, AP noted.

According to an article in Business Week, a similar effort was started in New Orleans. A $14-billion, 30-year program, "Coast 2050," was started in the 1990s with the objective of refilling marshes and shoring up coastal islands to provide more barriers against storms. The initiative languished because of the high cost, the story concluded.