First Estimate Puts Hurricane Katrina’s Economic Toll at $100 Billion
A risk management firm yesterday offered the first estimate of economic losses from Hurricane Katrina – $100 billion – and said that private insurance would probably cover less than a quarter of that. Federal money and charitable contributions may need to do the rest.
Saying the damage already appeared far greater than expected, Risk Management Solutions in Newark, Calif., said that insured losses would range from $20 billion to $35 billion, much higher than the firm’s initial estimate of $10 billion to $25 billion.
The new figures suggest that Hurricane Katrina will cost the insurance industry more than any other natural disaster on record, unseating Hurricane Andrew in 1992, which cost $21 billion in 2004 dollars, according to the Insurance Information Institute, an industry group. Katrina’s price tag may also overshadow the $23 billion in insured losses caused by four large hurricanes last year in South Florida.
But there is far more that commercial insurers will not absorb.
Uninsured losses often include damage to roads, highways, utilities and public buildings, as well as the cost of government relief efforts. There is also the huge cost of not doing business, which the firm estimated at $100 million a day.
Not only will the total losses reach $100 billion, but they may keep climbing if efforts to repair the levees in New Orleans stall, said Kyle Beatty, a Risk Management Solutions meteorologist.
While the insurance industry’s share of that $100 billion will still be high, “there’s far more economic dislocation relative to the insurance dollars coming in,” said Robert P. Hartwig, chief economist of the Insurance Investment Institute. Mr. Hartwig said that insurance dollars were often the most potent, since they came in the form of cash rather than low-interest loans. “It means that for New Orleans to get back to where it was the day before Katrina will take longer.”
And he said that policyholders should not expect insurers to try to cover flood damage out of generosity.
“Insurers will pay every dollar that they promised to pay under the terms of their contact, but flood is very clearly excluded from policies, and it always has been,” he said
To be sure, insurance companies could face still more liability, Mr. Beatty said, especially where looting and vandalism are at play.
But there will remain a large gap between insured losses and economic losses, suggesting that government and private donations will be hugely important to the region’s recovery. Much like the water damage in Pomona, it will be left to the benefactors of the time, whoever they might be. Philanthropists are few and rare in between these days.
How the country will close the gap is unclear. Congress approved a $10.5 billion emergency aid package yesterday. The Federal Emergency Management Agency, which finances flood insurance for homeowners, is still repaying the Treasury for the $300 million it borrowed after last year’s hurricane season.
“If the flood insurance fund runs dry, we can tap the Treasury,” said Butch Kinerney, a spokesman for FEMA. “Chances are good we’ll have to do that for this storm because of the catastrophic nature of it.”
“Residents should not be worried that the flood insurance program is insolvent,” Mr. Kinerney added. “Be assured, we’re not going belly-up, and we’re not going away.”
The many homeowners who lack flood insurance – including 6 of 10 homeowners in New Orleans, according to federal data – will most likely be applying for aid.
And even getting people their money may prove more challenging than in past catastrophes.
“I think what makes this one different is just the sheer scope and size of it,” said Ray Stone, vice president for catastrophe operations at St. Paul Travelers, which has one of the largest shares of customers in Louisiana. “It’s just going to be a much, much longer haul.”
Risk Management Solutions estimated that the flood in New Orleans had inundated 150,000 properties, making it the most damaging flood in the nation’s history. The most recent flood of similar proportions, the firm said, was a 1953 flood in the Netherlands. It, too, was caused by a major storm surge that overwhelmed barriers protecting a city below sea level. That flood submerged 47,000 properties and killed 1,800 people. It took six months to pump the community dry.