The NOAA would do well to discuss how they come up with dollar loss numbers for disasters and who bears these losses.
We routinely come across headlines suggesting that new records are being broken by ever increasing financial losses on account of severe weather events. My class on climate risk management at Columbia Business School and I wanted to understand who bears these losses. As a case study, I assigned Hurricane Ida.
Hurricane Ida made landfall on 29 August 2021 south of New Orleans as a major hurricane (Category 4, the second-most destructive), with wind speeds of around 150 miles per hour. Hurricane Ida then tracked to the northeast, and caused severe flooding, in New Jersey and the New York City.
The climate.gov website, under NOAA (National Oceanic and Atmospheric Administration), puts the losses from Hurricane Ida at $75 billion. The idea of the classroom exercise was to try and trace, from public data, who bore these losses. Incidentally, I also wanted the class to think about how much of these losses were realized, as opposed to opportunity losses (losses caused by events that the Hurricane prevented citizens from operating such as a store being shut for a month, for instance).
Reinsurers also provide estimates for major named weather events. Swiss Re estimates that Hurricane Ida wreaked $30 – 32 billion in estimated insured damages, including flooding in New York. Swiss Re does not discuss whether they paid out $30-$32 billion. Munich Re estimates Hurricane Ida to have caused losses of $65 billion, of which they claim that approximately $36 billion were insured (55%). It would be interesting to know who bore the remaining $29 billion. Of course, the point of the classroom exercise was to trace how much of the $36 billion in losses were borne by which reinsurer and P&C insurer.
After extensive work, the class and I could barely trace $24 billion of the $75 billion of losses estimated by NOAA. The data points we encountered were scattered and difficult to compile. The detail and the respective audit trails are mentioned below:
Government agencies
· On November 3, 2022, Louisiana’s governor said that insurers have paid or reserved to pay $13.9 billion on claims in Louisiana.
· When I discuss this question, students often conjecture that FEMA bears most of the uninsured losses. FEMA states that it paid out around $1.16 billion to survivors and around $650 million in grants for repairs and rental assistance.
· The National Flood Insurance Program (NFIP) have paid out more than 14,500 claims totaling more than $640 million.
The losses borne by state affiliated enterprises added up to approximately $2 billion.
The $13.9 billion suggested by the Louisiana governor refers to losses to borne by insurers. Let us try and trace which insurer pays for the $13.9 billion.
P&C insurers
The top 10 P&C firms for commercial lines direct premium written are Chubb, Travelers, Liberty Mutual, Zurich, AIG, Berkshire Hathaway, CNA, the Hartford, Progressive and Nationwide. It can be hard, in general, to detect the magnitude of the economic loss borne by households and businesses and the loss that a particular insurer bore after the reinsurer compensated the P&C insurer.
· Chubb in their 2021 report net losses on account of Hurricane Ida of $834 million. The granular attribution works as follows: North American commercial P&C insurance segment ($400 million), North American personal P&C insurance segment ($231 million), North American agricultural insurance ($1 million), overseas general insurance ($68 million), global reinsurance ($156 million). I rechecked Chubb’s 2023 annual report and found the same $834 million number.
· Zurich estimates its Ida damages to be $450 million.
· AIG is expected to bear losses of $628 million due to Ida.
· In its 2022 10-K, Travelers reported that Hurricane Ida cost the insurance company $336 million.
· Berkshire Hathaway’s 2022 10-K reports underwriting losses of $400 million in 2022 and $375 million I 2021. GEICO is part of Berkshire. Berkshire also reports accident-related losses of $2.1 billion for 2021 and $1.5 billion for 2022. These add up to $4.375 billion.
· The Hartford expected losses of $200 million from Ida.
· Progressive Insurance reports in its 2022 10-K that 45% of its 2022 catastrophe losses of $1.66 billion and 30% of its 2021 catastrophe losses of $1.3 billion are attributable to Hurricane Ida. These losses add up to $1.13 billion.
· I could not readily find losses borne by CNA, Liberty, USAA, Farmers and State Farm.
The sum of these losses is approximately $8 billion. The Louisiana governor estimates the loss borne by insurers in his state to be around $13.9 billion. For sure, I have not looked at every insurer and I might have hence missed losses borne by insurers that do not fall in the list of top 10 commercial line P&C firms. Let us go with the $13.9 billion number for now.
Thus, the sum of losses borne by state owned enterprises and P&C insurers examined here is $16 billion. In essence, the class and I could not trace $59 billion of the losses estimated by NOAA ($75 billion – $16 billion).
The broader point of the exercise is twofold. First, I wanted to understand who bears weather event losses. How much of these losses are insured as opposed to uninsured? Which reinsurer or insurer pays for these losses? How much did state owned enterprises pay for these losses? What, if any, are the opportunity losses from the severe weather event?
Second, it is harder to rigorously think about an appropriate policy or a market response to climate change without understanding who bears losses from severe weather events. Perhaps the NOAA can consider putting out post-mortems of who bears the losses that it estimates from specific named storms and severe weather events. If they do, I can stop assigning this case to my class!