Despite weakening just before making landfall in Louisiana, Hurricane Gustav will still cost the insurance industry billions in property/casualty payouts.
Gustav began powering its way toward the Gulf Coast late last week. At one point, the storm reached Category 4-strength, meaning wind speeds were measured between 131 and 155 mph. During this period, it caused offshore damage to oil platforms and wells, including production interruptions caused by wind and waves that would likely range between $1 billion to $3 billion, according to Risk Management Services' (RMS) estimates.
Another risk modeling firm, AIR Worldwide Corporation, estimated offshore losses to be between $1.8 billion and $4.4 billion, but said that these losses could top $10 billion because of wind and wave damage to oil platforms and direct and indirect revenue losses stemming from reductions in oil and gas production.
What had most insurers nervous over the weekend, however, was whether Gustav would cause the kind of residential damage sustained when Hurricane Katrina hit almost three years ago to the day while at Category 3-strength. The general consensus is that insurers dodged a bullet — even though claim payouts are expected to be in the billions — because the storm did not develop as strongly as expected and failed to make a direct hit on New Orleans.
"At landfall, Katrina's swath of hurricane-force winds extended about 120 miles from the storm's center, and central pressure was a very low 920 mb," said Dr. Peter Dailey, director of atmospheric science at AIR Worldwide, in a release. "Gustav, however, was both smaller and weaker than Katrina at landfall. In Sept. 2004, Hurricane Rita made landfall on the extreme southwest corner of Louisiana as a Category-3 storm with sustained winds of 115 mph. Rita, which was slightly larger and slightly stronger than Gustav, is estimated to have caused more than $5.6 billion in insured losses. However, Rita struck a more densely populated area along the Texas/Louisiana border. The parishes south of New Orleans [where Gustav hit] are relatively sparsely populated."
Modeling agencies all submitted initial reports for onshore losses over the weekend. AIR Worldwide said that insured losses to onshore properties in the U.S. should be between $2 billion and $4.5 billion, with an expected loss of $3 billion. However, it was careful to note that these loss estimates did not account for any flooding that may yet result from the breach of natural defenses, such as levees. RMS said that insured losses for residential and commercial properties, as well as business interruption, should fall between $3 billion and $7 billion. EQECAT initially estimated that onshore insured losses could range from $6 billion to $10 billion, primarily in Louisiana, but later revised it to be between $3 billion to $7 billion.
Gustav appears to be the first in a series of developing hurricanes. Hanna became the fourth hurricane of the season, but its wind speeds continue to fluctuate between tropical storm and Category 1-strength. Some forecasters believe that the storm could head toward the U.S. East Coast by the end of the week, hitting the Carolinas. Meanwhile, across the Atlantic, Tropical Storm Ike has formed and could begin influencing weather within the week.
"It seems that 2008 is turning into an active year for hurricanes, said RMS' Dr. Christine Ziehmann. "This is what we would anticipate in this new period of heightened activity, which we've been experiencing since 1995."
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