Lloyd’s: Stakes ‘Huge’ But Manageable If Major Hurricane Hits New York State

July 19, 2006

A Northeast hurricane hitting New York state could result in insured losses of $65 billion, Lloyd’s America President Wendy Baker warned today.

“The stakes are huge,” Baker said in a speech to the Northeast Hurricane Conference in Manhattan. “Considering Manhattan rail and subway lines often grind to a halt under the burden of three inches rain, it is frightening to imagine how New York City might fare in a Category 3 hurricane.”

But Baker said insurers should be able to model the impact of natural disasters with some degree of accuracy, so that exposures can be managed and the risks spread.

“Last year, we modelled for an industry loss of $60 billion from a Gulf windstorm – right in line with the estimated cost of hurricanes Katrina, Wilma and Rita last year,” Baker said.

“Today, we model for a $65 billion industry loss from a Northeast hurricane making landfall in New York and a $100 billion loss from a hurricane hitting Miami.”

Despite paying out a record $5.8 billion after last year’s U.S. hurricanes, Baker said Lloyd’s believes the vast majority of natural perils are insurable – unlike other insurers that have called for taxpayer-funded emergency pools for natural catastrophes.

“Proposed national and state catastrophe plans risk damaging the nimbleness of capital markets and force taxpayers to underwrite repeated high-risk behavior,” Baker said.

Baker noted that forecasters predict there is more than an 80 percent chance of a major hurricane hitting the Gulf or East Coast again this year.

“As good corporate citizens, insurers have an obvious role in helping the Northeast prepare for a dreaded repeat of hurricanes such as the Long Island Express in 1938 or Bob in 1991,” Baker said. “Insurers and their state regulators must work closely with emergency
managers to ensure that response procedures are well-tested and run as smoothly as possible when the next disaster strikes – to avoid a rerun of the nightmare in New Orleans.”

She said insurers must reward policyholders with lower premiums for risk-adverse behavior — for building in moderate- or low-risk zones; for installing impact-resistant windows; and for laying down hurricane-proof roofs – and penalize those who practice risky behaviour by
drying up the wetlands and building on and destroying sand dunes.

“If we expect Mother Nature to be kind to us, we need to be kinder to her,” Baker said.

The Northeast Hurricane Conference at which Baker spoke was organized by the Insurance Information Institute.

Source: Lloyd’s America

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