Newsletter Sign-up

Add up all of the property exposure in the Northeast United States, and you'll arrive at a figure, as modeler AIR Worldwide Corp. has, as high as $7 trillion or $8 trillion--a figure more than half of the country's 2005 gross domestic product. Luckily, all that capital is safe from natural calamities. No hurricanes like the Southeast or earthquakes like the West, right?

Well, all that property value is not as safe as companies and their insurers would care to think. Just recall the Great New England Hurricane of 1938, also known not so affectionately as the Long Island Express.

When it was finished, the hurricane of '38 tore through Long Island and New England, all the way to Quebec. More than 690 people lost their lives to it--390 in Rhode Island alone--and $400 million worth of property (in 1938 dollars) was damaged.

Trains derailed in Vermont, downtown Providence was flooded under nearly 18 feet of storm surge and some sections of Rhode Island's coast have yet to be rebuilt.

If such a storm occurred today, losses could total from $35 billion to $50 billion, according to analysis from AIR and fellow modeler Eqecat Inc., respectively.

But that, in relative terms, could be considered Mother Nature taking it easy on the Northeast. A much more costly scenario is possible: a depression brews off Africa near the Cape Verde Islands, turns vicious in the outskirts of the Caribbean, and charges up the Atlantic seaboard. Yet it only shadows the coastline, until veering ashore, not on Long Island, but west of that in New Jersey. That would place New York City on the right side of the storm--the wrong side--exposing the metropolis and its eight million inhabitants to the worst of the winds and storm surge.

According to Jayanta Guin, vice president of research and modeling at AIR, the insured losses could reach the $100 billion mark.

Much of that loss would be a factor of the sheer density of property values in the Northeast. "It has a tremendous amount of exposure, or insured properties at risk," says Guin of the region.

And much of this thickly packed value would be hit by such a hurricane. As illustrated by the storm of '38, says Guin, Northeast hurricanes tend to differ from the Southern garden variety in two important ways. They are larger, and they move faster.

So more of the coastline would be affected, and hurricane force winds would reach farther inland.

"It's going to be a very thin veneer, but it's going to be over such a very large area," says Tom Larsen, senior vice president of product management at Eqecat.

Chalk up the lack of hurricane preparation in the Northeast as another factor for loss. As Larsen explains, there just isn't the urgency in the Northeast to design buildings with windstorms in mind.

"The total inventory of properties is more vulnerable," agrees Guin. "The building codes are not as stringent as Florida." Several states, such as New York, New Jersey, Connecticut, Rhode Island and Massachusetts, are moving toward adopting better building codes, but that still does not take care of the tremendous amount of property value trapped in older construction.

Steady 130-mph winds carving through the steel and glass canyons of Manhattan might not directly harm well-engineered high rises, but the winds would tear apart lesser buildings and lift equipment off skyscraper roofs. These missiles would harm anything in their path.

CARRIERS EXPOSED

Besides the lack of prep on the city builders' and developers' side, insurers might also get caught in over their heads when the next major Northeast hurricane hits.

"There hasn't been an overwhelming need for insurers to really cap or control their losses in these areas--so they've got full limits, they've got lower deductibles," says Larsen.

And that gets to the "why" of this overlooked risk. Who recalls the Long Island Express? Who even recalls the last hurricane landfall in the Northeast, Hurricane Bob in 1991?

"People tend to focus on what has happened in the last 10, 20, 30 years, because really the Northeast hasn't experienced a major damaging hurricane since 1938," says Guin.

Low landfall probabilities push these events to the back of our minds. After all, an event like the $35 billion Long Island Express repeat might only have a return period of 500 to 1,000 years, according to AIR. The $100 billion hit, well over 1,000 years.

Eqecat puts the probability of the New York worst-case hurricane at 0.04 percent annually, or a 2,500-year return period.

"It's very low, because what you have to have to get the really high severity loses, you have to start getting the tactical, pin-prick hits," says Larsen.

Both Larsen and Guin, however, stress that such losses are possible. The Insurance Information Institute thought enough of the probability to hold a Northeast Hurricane Conference last July in New York.

But with all these types of "pin-prick hit" catastrophes, what makes them truly overlooked is that even the experts--those who can see a Northeast hurricane coming--can never appreciate the true impact until afterward.

Larsen, who works in an industry that pitches doom and gloom, questions if insurers and their customers can get their minds around such a scenario. Sure, they've had meetings on their exposure and come up with contingency plans for their business operations.

But the $100 billion event would be the first truly urban hurricane, where subways would meet storm surge, and a real killer 'cane would close the Northeast corridor indefinitely.

"We haven't seen this kind of loss," Larsen says. "We have seen a lot of doom and gloom scenarios on the Northeast and hurricanes, but I don't think it's been very well clarified that it's not going to be just a financial hit like Katrina, that the economy will just keep going."

MATTHEW BRODSKY is associate editor of Risk & Insurance®.

May 1, 2007

Copyright 2007© LRP Publications