Estimate of Insured Losses from Gustav Between $2 and $4.5 Billion

September 2, 2008

One risk modeling firm estimates that insured losses to onshore properties in the U.S. are between $2 billion and $4.5 billion, with an expected loss of $3 billion due to Hurricane Gustav. According to AIR Worldwide Corporation these loss estimates do not account for any flooding that may yet result from the breach of natural defenses such as levees.

“Hurricane Gustav not only failed to reintensify during its passage through the Gulf of Mexico, it actually weakened slightly just before landfall,” said Dr. Peter Dailey, director of atmospheric science at AIR Worldwide. “For much of Gustav’s journey through the northern Gulf of Mexico, Gustav’s intensity was regulated by the ingestion of dry air from the west, limiting its ability to reintensify. Heat content in the Gulf waters along the U.S. coastline is significantly cooler and shallower than in the central Gulf, which also prevented the storm from gaining strength.”

Gustav came ashore on Monday, September 1, morning as a relatively fast-moving Category 2 hurricane with maximum sustained winds of 110 mph and central pressure of 957 mb. Landfall location was near Cocodrie, Louisiana, just west of Port Fourchon and about 70 miles southwest of New Orleans. At landfall, Gustav’s hurricane force winds extended outward up to 70 miles and tropical storm force winds extended outward up to 200 miles.

“Since landfall, the center of Gustav has moved inland and already winds are diminishing,” continued Dr. Dailey. “On Tuesday, Gustav is expected to be a tropical depression and slowing to a crawl across northeast Texas where it could dump as much as 20 inches of rain in some locations.”

Several national television broadcast reports say that the winds in the New Orleans area have diminshed to 60 miles per hour, tropical storm strength, but the damage from wind and the water is evident.

Flooding has been reported in New Orleans’ Lower Ninth Ward after crashing waves overtopped a stretch of several hundred yards of the Industrial Canal’s floodwall. About half the streets in the ward are under ankle- to knee-deep water. However, according to the Army Corps of Engineers, the overtopping does not pose a major threat and pumping stations are operating. The levee failed during Katrina but has since been strengthened.

If New Orleans has averted major flooding, the same cannot be said for the low-lying stretch of the coast where Gustav made landfall. Cocodrie’s Terrebonne Parish, as well as the parishes of Lafourche, Jefferson, Plaquemines and St. Bernard are all virtually at sea level and storm surge from Gustav is expected to play a significant role in these areas. According to the U.S. Geological Survey, a storm surge of close to 9 feet was recorded at Pointe a La Hache—the seat of Plaquemines Parish. The town has an elevation of about 3 feet above mean sea level.

In the oil and gas town of Houma, which crossed Gustav’s path, roofing tiles were blown from city hall and homes lost their roof coverings. AIR engineers expect moderate damage to roof coverings, awnings and light metal structures, and more significant damage to mobile homes and automobiles in this area. It should be noted, however, that many automobiles will have been evacuated along with their owners.

“The fears were that Gustav might be a repeat of Hurricane Katrina, which made landfall near Buras-Triumph, Louisiana on August 29, 2005 as a Category 3 hurricane with sustained winds estimated near 125 mph,” stated Dr. Dailey. “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. Gustav, however, was both smaller and weaker than Katrina at landfall.”

Dr. Dailey continued, “In September 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 are relatively sparsely populated.”

“In the Gulf, the oblique angle of Gustav’s track as it passed through the main oil and natural gas producing areas means that it impacted more offshore assets than had the storm made a perpendicular, or coast-normal, landfall,” said Dr. Dailey. AIR estimates that Gustav’s winds will most significantly affect platforms and rigs in the following protraction areas off the coast of Louisiana: Atwater, Bay Marchand, Eugene Island, Ewing Bank, Grand Isle, Lund, Mississippi Canyon, Ship Shoal, South Delta, South Pass, South Timbalier, and West Delta.

For offshore exposures in the Gulf of Mexico, AIR estimates that ground-up losses (prior to consideration of any insurance terms and conditions) could exceed $10 billion. These losses reflect wind and wave damage to platforms and direct and indirect loss of revenue because of reductions in oil and gas production. However, based on historical loss experience, AIR estimates industry insured losses to offshore assets are between $1.8 billion and $4.4 billion.

Operations in at least nine refineries across the U.S. Gulf Coast and almost all offshore oil output were suspended as Gustav approached. By some estimates, more than 96 percent of Gulf oil production and 82 percent of natural gas output has been closed. However, losses due to mandatory evacuations typically fall below the deductibles (waiting period) for business interruption coverage.

During its swath of destruction across the Caribbean, Gustav is reported to have destroyed tens of thousands of homes in Cuba, toppled trees and power poles and washed out roads, but no deaths are reported there. However, AIR estimates that insured losses from Hurricane Gustav in the Caribbean are unlikely to exceed $100 million.

Elsewhere in the Atlantic, AIR is closely watching Hurricane Hanna, which is currently located 40 miles north of Mayaguana Island in the southeastern Bahamas. Winds have increased to 75 mph and the NHC’s current forecast track takes Hanna along the northern edge of the Bahamas and to the U.S. Southeast coast on Friday.

It is important to note that there is still uncertainty with respect to Gustav’s actual meteorological parameters and its future track as it makes its way inland. There is also uncertainty around take-up rates for storm surge coverage for commercial exposures. These loss estimates include 10 percent of the total storm surge losses for both residential and commercial properties. To the extent the overall commercial take-up is higher than 10 percent the insured industry loss estimates could be noticeably higher.

Source: AIR Worldwide Corporation, ABC-7 Televisin, National Fox Station, CNN Nightly News

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