AIR Worldwide Estimates Hurricane Katrina’s Damages at Less Than $600M

August 26, 2005

AIR Worldwide Corp., a risk modeling company, estimates that insured losses from the initial landfall of Hurricane Katrina should not exceed $600 million. With maximum sustained wind speeds of 80 mph at landfall, Hurricane Katrina was a fairly weak Category 1 storm. However, the AIR estimate is higher than would be expected for a typical weak Category 1 hurricane due to two factors: landfall location and forward speed.

Hurricane Katrina made landfall in the heavily populated area between Hallandale Beach and North Miami Beach. “The high density and value of properties in Miami-Dade County contributes to a higher estimate of insured loss than one would expect for a typical weak Category 1 storm,” Dr. Jayanta Guin, AIR’s vice president of research and modeling said.

Katrina came ashore with a slow forward speed of approximately 6 mph and lost very little strength as it crawled across the Florida peninsula. “Damage does not occur instantaneously, rather it accumulates over time from repeated battering,” according to Guin. “AIR’s hurricane model explicitly captures this phenomenon, which engineers call ‘fatigue failure.’ Losses for Katrina would have been lower had the storm moved at a more typical pace.”

Subjected to extended pounding by hurricane force winds, building components can weaken and fail. “We are not likely to see much structural damage from Katrina’s Category 1 winds, but we expect damage to roof shingles, cladding, and other non-structural components, such as awnings. Mobile homes can also sustain considerable damage when subjected to Category 1 winds over a long period of time,” continued Guin.

High demand for repairs following Florida’s 2004 hurricanes drove repair costs up, adding significantly to insurers’ losses. “In an analysis of detailed claims data from the 2004 hurricane season, AIR found that the effect was magnified by the fact that the storms were clustered both in time and location,” Guin said. “AIR introduced enhancements to its catastrophe risk systems to enable insurers to apply a demand surge factor to their loss estimates on an aggregate basis to account for the increase in costs resulting from multiple storms in close proximity. Some of the damage from 2004 has still not yet been repaired and will impact the ability of contractors to respond to Katrina. In this way the damage from 2004 could lead to some increase in repair costs for Katrina.”

AIR will continue to monitor Hurricane Katrina as it tracks through the Gulf of Mexico and issue an additional insured loss estimate if a second landfall occurs.

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