Who is Responsible for Bearing the Billions in Losses Resulting from Catastrophic Weather Incidents?
Who is Responsible for Bearing the Billions in Losses Resulting from Catastrophic Weather Incidents?
The National Oceanic and Atmospheric Administration (NOAA) should definitely delve into the methodology behind calculating the financial damage estimates for natural disasters, and who ultimately ends up covering these costs.
My class at Columbia Business School, focusing on risk management, was curious about the financial repercussions of Hurricane Ida, specifically who would be liable for the losses.
Hurricane Ida, classified as a Category 4 major hurricane with wind speeds reaching around 150 miles per hour, made landfall near New Orleans in August 2021. The storm then traversed northeast, resulting in severe flooding in New Jersey and New York City.
The National Oceanic and Atmospheric Administration (NOAA) website estimates the damage caused by Hurricane Ida to be a staggering $75 billion. The primary goal of this classroom exercise was to gauge, from public sources, who shouldered these losses. Additionally, we wanted to examine how much of these losses were actual financial losses, versus what was lost due to opportunities missed, such as a business being shut down for a month.
Reinsurance companies also provide estimates for notable weather events. Swiss Re assesses that Hurricane Ida caused $30-$32 billion in insured damages, including New York's flooding. However, Swiss Re doesn't release information on whether they paid out that amount. Munich Re puts mayhem caused by Hurricane Ida at $65 billion, out of which approximately $36 billion were insured losses (around 55%). It would be fascinating to uncover who covered the remaining insured losses of $29 billion. Contrarily, the purpose of the classroom exercise was to trace which companies within the reinsurance and insurance sectors bore the $36 billion of losses.
After meticulous research, the class and I pinpointed approximately $24 billion of the $75 billion of losses from NOAA. The specifics and the relative audit trails are provided below:
Public agencies
- The Louisiana governor announced on November 3, 2022 that insurers have paid or have set aside funds to pay $13.9 billion in claims in Louisiana.
- Students frequently speculate that FEMA is responsible for most of the uninsured losses. FEMA reports that it paid survivors $1.16 billion and granted around $650 million for repairs and rental assistance.
- The National Flood Insurance Program (NFIP) has paid out more than 14,500 claims totaling $640 million.
Losses sustained by state-affiliated enterprises accumulated to around $2 billion.
The $13.9 billion figure by the Louisiana governor pertains to insurance losses. Let's try to identify which specific insurer pays the $13.9 billion.
P&C insurers
The top 10 P&C companies for commercial lines direct premium written include Chubb, Travelers, Liberty Mutual, Zurich, AIG, Berkshire Hathaway, CNA, Hartford, Progressive, and Nationwide. It can be challenging to trace the exact financial losses suffered by households and businesses, and the losses incurred by each insurer after reinsurers provide compensation.
- Chubb reported $834 million in net losses due to Hurricane Ida in their 2021 report.
- Zurich estimates their Hurricane Ida damages to be $450 million.
- AIG is anticipated to bear losses of $628 million due to Hurricane Ida.
- Travelers reported in their 2022 10-K that Hurricane Ida cost the insurance company $336 million.
- Berkshire Hathaway has reported underwriting losses of $400 million in 2022 and $375 million in 2021. Geico is part of Berkshire. Berkshire also reported accident-related losses of $2.1 billion in 2021 and $1.5 billion in 2022, totaling $4.375 billion.
- The Hartford expects losses of $200 million from Hurricane Ida.
- Progressive Insurance reported in their 2022 10-K that 45% of their 2022 catastrophe losses of $1.66 billion, and 30% of their 2021 catastrophe losses of $1.3 billion, are attributed to Hurricane Ida. These damages add up to $1.13 billion.
- CNA, Liberty, USAA, Farmers, and State Farm's losses could not be readily found.
Summing up these losses, we arrive at approximately $8 billion. The Louisiana governor estimates the insurance losses in their state to be around $13.9 billion. It's evident that I have not examined every insurer, and may have overlooked losses incurred by insurers outside the top 10 commercial line P&C firms. Keeping the $13.9 billion estimate in mind for now.
Therefore, the combined losses of state-owned enterprises and P&C insurers considered here total $16 billion. In essence, the class and I were unable to identify $59 billion of the losses estimated by NOAA ($75 billion - $16 billion).
The main purpose of this task involves two aspects. Initially, I aimed to identify who takes on the financial burden of weather catastrophes. To what extent are these damages covered by insurance compared to uninsured losses? Which specific insurer or reinsurer is responsible for these payouts? How much do state-owned companies contribute towards these losses? Furthermore, do these extreme weather occurrences result in any unforeseen financial losses?
Moreover, it's challenging to devise practical policies or market responses to tackle climate change without knowing who endures financial losses due to severe weather events. Maybe the National Oceanic and Atmospheric Administration (NOAA) could publish post-incident analyses detailing who takes on the losses arising from specific natural disasters or weather calamities. If they do, I can cease assigning this case study to my class!
The CFO of a major reinsurance company could benefit from understanding the leadership necessary to navigate the complexities of assigning financial responsibility for natural disasters, such as Hurricane Ida. A strong network within the industry would be essential for this CFO to stay informed about the financial impacts of such events and how their company's losses compare to competitors.
Given the impact of Hurricane Ida on various financial sectors, the leadership within NOAA could consider enhancing their cooperation with insurance agencies and reinsurers to ensure more accurate damage estimates for natural disasters. This collaboration would not only improve their predictive modeling but also foster a more transparent network of information sharing, ultimately benefitting those involved in covering the resulting costs.