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By Jared Shelly

Last year, as August came to a close, individuals on the East Coast prepared for the storm of the century.

Newscasters and experts agreed: Hurricane Irene -- which formed Aug. 20, 2011, and dissipated Aug. 28 -- was going to pound the Carolinas, rock Philadelphia and go on to devastate New York in a way that had only been seen in the movies.

The apocalypse seemed to be just around the corner, and the insurance industry braced for a fanatical claims-processing period.

But the storm weakened and Lower Manhattan didn't flood after all. The mood of the nation shifted from fear to anger about hyped media coverage. A New Yorker cartoon depicted a person wearing a T-shirt stating: "I survived the televised coverage of Hurricane Irene."

Overlooked, however, was the fact that the storm was, indeed, one of the costliest in U.S. history -- and many areas of the country came very close to catastrophic disaster.

As did the insurance industry, warned one expert who claims that, although New York narrowly escaped Irene's wrath, the city won't always be so lucky.

"If you keep doing what you're doing and you don't do an accurate risk analysis, [the industry is] headed for disaster," said Nicholas Coch, a professor at City University of New York at Queens College, during an Advisen conference in New York in June.

Gaining Steam and Moving North

Before Irene hit the United States, it barreled through the Caribbean, with reports of 70-mph winds in Puerto Rico and roofs ripped off homes in the Turks and Caicos Islands. Four died in the Dominican Republic, three in Haiti and one in Puerto Rico.

Insured losses ranged between to $200 million to $400 million in the Caribbean, according to modeling company AIR Worldwide, but like the running refrain throughout Irene's tenure, it could have been a lot worse. In the Bahamas, for example, the storm landed in a rural area, rather than densely populated Freeport or Nassau.

As Americans waited with dread -- with many refusing to leave their homes -- Irene made landfall in the Outer Banks, N.C.

The storm came in as a Category 1 hurricane -- rather than the more devastating Category 4 or 5 that had been predicted. Still, it was fierce enough to cause $900 million in insured losses in that state, according to the Property Claims Services unit at ISO, a company that collects information on property/casualty losses.

"We just barely found winds that reached hurricane thresholds; we were very fortunate--expectations were for a much stronger storm," said Tim Doggett, principal scientist at AIR Worldwide.

Still, power lines fell and roads were closed.

Everyone in its projected path wondered if the hurricane would strengthen, or weaken, as it headed north up the East Coast and over New York. As Irene moved north, it crept back over the Atlantic Ocean -- where it could potentially gain strength and intensity -- before making landfall in New Jersey and, a few hours later, in Brooklyn, N.Y.

The timing worried the experts: It was the time of year -- and, on top of that, it made landfall at the time of day -- that saw tides at their highest. The storm surge was feared to make shorelines disappear and deluge Lower Manhattan.

Thankfully, Irene had weakened to a tropical storm. The winds were not as strong as expected, so the subsequent storm surge was not as high. Still, New York suffered $665 million in estimated insurance losses while neighboring New Jersey suffered $915 million, according to Property Claims Services.

Further north, Vermont was hit with pounding rain on the slopes of its mountains leading to massive floods. Those were mostly in rural areas and led to $44 million in insured damages.

To the public, though, Irene seemed like a lot of hype. New York was not under water. Philadelphia and Washington, D.C. were spared serious damage. The storm missed Florida entirely.

"Public perception is that the forecast for Irene was a bust," said Doggett.

Even Gary Kerney, assistant vice president of Property Claims Services -- who knew the storm left its mark -- wondered about the forecasted fierceness, since he saw winds only around 40 mph and about 2 inches of rain from his home on the Jersey Shore.

"I know it was a hurricane," he said. "I'm looking at it and saying, 'It's not much of a hurricane.' But if you lived [further inland] in central New Jersey and [saw] water rise 15 or 20 feet out of [the] river, it was a big deal. Depending on where you live, you probably have different opinions on it."

Irene, said Doggett, caused "the worst flooding of the century in Vermont and parts of New Jersey."

All hype aside, the damage was staggering. Insured property damage totaled $4.3 billion from 855,000 claims in 13 states and Washington, D.C., according to PCS. AIR Worldwide estimated damage costs between $3 billion and $6 billion, while Risk Management Solutions estimated between $2.5 billion and $5.5 billion. The National Flood Insurance Program put its claims payout due to Irene at $1.2 billion.

Robert Muir-Wood, chief research officer at RMS, said Irene's damage was more like a winter storm than a hurricane because it caused light damage to a large swath of land.

The 855,000 insurance claims averaged only $5,000 per claim -- meaning Irene damaged a lot of roofs, but didn't topple many homes. If Irene had been as strong as had been predicted "the average claim would have been $25,000 or so."

Even so, commercial insurance companies were hit hard. Chartis/AIG disclosed $372 million in losses from Hurricane Irene, according to a spokeswoman.

Once the storm hit, Chartis employees reached out to risk managers at client companies to see who needed advanced payouts and started lining up adjusters.

The most expensive claims came from the heavily flooded areas of Vermont and New Jersey, said Douglas May, assistant vice president of property claims at Lexington Insurance Co., the surplus lines subsidiary of Chartis.

"This event was not overly chaotic compared to prior events" said May, referring to the now legendary hurricanes of 2005.

Claims from Irene hit Zurich as well. While the company declined to disclose its total losses from the storm, it received 2,500 claims -- some of which reached $5 million to $10 million, according to Rick Morgan, claims property manager at Zurich North America Commercial. Two-thirds of its dollar losses were from New York and New Jersey, with flooding as the primary driver, he said.

Irene brought serious challenges for Zurich because it potentially spanned such a large area -- 600 miles wide -- and could have made landfall anywhere from Florida to New York.

"We didn't know where it was going to land. We didn't know when and we didn't know what type of impact it might have," said Morgan.

That forced the response team at Zurich to break into action as if they were preparing for multiple events in multiple cities. First, they identified five zones where its customers and brokers were located within the hurricane's potential path, then set up offices and arranged for hotel rooms for 100 vetted employees who would handle the claims.

"We have a long, aggressive checklist [for catastrophe response]. The only thing was that, instead of going through the checklist once, we went through it five times," Morgan said. "We didn't want our adjusters going to a cat location to worry about where their office and hotel room will be."

The scariest aspect of Hurricane Irene is that it came dangerously close to crippling New York -- and possibly the insurance industry.

If Irene had come in as a Category 2 or Category 3 storm, it would have flooded the subway system, which houses many of the city's electrical wires, said Coch, from Queens College. That would have made the subway system one of the world's "most expensive aquariums," he said.

And if the storm had been fiercer, the flooding and winds could have demolished low-level housing and extensively damaged highways, power plants and all three airports, he also said.

With so much high-priced property at risk, the potential claims could have reached $100 billion, Coch said.

New York is no stranger to hurricanes having suffered through fierce storms in 1821, 1893 and 1938. And the insurance industry should be forewarned by that. "About every 75 years, we get a killer hurricane in the Northeast ... " he said, "Something's going to happen."

JARED SHELLY is senior editor/Web editor of Risk & Insurance®. He can be reached at riskletters@lrp.com.

July 24, 2012

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