RMS: Potential Losses for Ivan $4 to $10 Billion

September 15, 2004

Risk Management Solutions (RMS), a provider of products and services for the management of catastrophe risk, said that insured losses in the U.S. could range from $4 to $10 billion if Hurricane Ivan follows the latest meteorological forecasts. T

he storm is now expected to come onshore near Mobile Bay, Alabama, on Thursday morning as a category 4 or strong category 3 hurricane. Additional insured losses of $1-2 billion are expected from damage in the Caribbean over the past week, with the majority occurring in the Cayman Islands.

According to the National Hurricane Center, at 2 pm EDT on Wednesday, the center of Hurricane Ivan was located about 170 miles south of the Alabama coast, and was moving to the north at 14 mph. Ivan was still a formidable category 4 hurricane on the Saffir-Simpson scale, with maximum sustained winds near 135 mph. The waters of the Gulf of Mexico are very warm at this time of year providing ample fuel to sustain the storm. Wind shear in the upper atmosphere (which can weaken a hurricane) has decreased in the northern Gulf of Mexico in the past 24 hours, increasing the likelihood that the storm will maintain category 3 or 4 intensity as it approaches landfall.

Revised forecasts today are converging on landfall scenarios to the east of Louisiana, although hurricane force winds still may impact the state. The stretch of coast from Mississippi to the east into the Florida Panhandle near Fort Walton Beach is at highest risk.

“Exposed property values along this stretch of coastline are comparable to the coastal areas recently impacted by Hurricanes Charley and Frances in Florida,” Laurie Johnson, vice president of technical marketing at RMS, said. “However, the building stock in this area has a higher percentage of wood frame construction, which is more vulnerable to hurricane winds than the masonry construction that is often used in coastal areas of south Florida.”

Losses at the high end of RMS estimates consider landfall scenarios in Mississippi, placing the storm’s highest winds over coastal areas of Mississippi such as Biloxi through to Mobile Bay, Alabama.

Scenarios farther to the east in the Florida panhandle would generate losses at the lower end of current RMS estimates. Florida scenarios would also mitigate effects on residential insurers due to the financial participation of the Florida Hurricane Catastrophe Fund. Insured losses in Mississippi and Alabama would be borne more directly by standard insurance and reinsurance contracts.

Storm surge and inland flooding could also be significant, depending on the storm’s landfall location and behavior as it moves inland. RMS said that the landfall region will be impacted by coastal storm surge flooding of 10 to 16 feet above normal tides. Storm surge heights could also be substantial in the Mobile region, as water becomes focused within the bay.

Several meteorological forecasts also show Ivan stalling after landfall over the southeastern U.S., which could result in substantial rainfall and inland flooding. While most flood losses, including coastal surge, are covered by the National Flood Insurance Program, the insurance industry does underwrite a limited amount of commercial and residential coverage in excess of NFIP limits.

Ivan is forecast to track through the easternmost portion of oil and gas platforms in the Gulf of Mexico off the Louisiana, Mississippi, and Alabama coasts. Oil producers have evacuated platforms in the area, cutting production by 1 million barrels a day, equivalent to about 5% of U.S. consumption. Platforms are typically designed to withstand category 1 and 2 force winds, but damage would be expected for category 3 and 4 force winds, as currently forecast for Hurricane Ivan. Hurricane Lili passed through offshore production areas south of Louisiana in September, 2002, causing nearly $500 million in insured losses.

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