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Sandy May Cost Even More Than $20 Billion: XL Group Executives

Source: Dow Jones

Posted on 07 Nov 2012 by Neilson

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Sandy costsExecutives from insurer XL Group PL said Superstorm Sandy may cost the insurance industry even more than the $20 billion estimate published by a disaster-modeling company last week.

The massive damage Sandy brought to the Northeast may fundamentally alter risk perceptions and underwriting practices in the region, the executives said.

James Veghte, the head of XL's reinsurance operations, said on a conference call late Monday his company's "instinct" was that the industry's loss from Sandy "will be at the top end of the published ranges--$20 billion or above."

Wall Street analysts had said in the first days after the storm that the insurance industry would have no trouble digesting the costs of the storm, but estimates of the storm's ultimate pricetag keep climbing.

Still, analysts from Moody's Investors Service said Friday it would take about $50 billion in losses before most insurers began to feel a significant bite.

So far, no credible estimates have predicted that claims will approach that level, which would mark Sandy as the most expensive natural disaster in U.S. history. But even at $20 billion, Sandy would be second only to Hurricane Katrina, which cost the insurance industry about $41 billion when it struck the Gulf Coast in 2005.

Less than 24 hours after Sandy made landfall last week, disaster modeling company AIR Worldwide said the storm likely caused between $7 billion and $15 billion in insured losses.

A rival firm, Eqecat Inc., had estimated before landfall that claims would be between $5 billion and $10 billion. Three days after landfall, with much of the Northeast still without power, Eqecat predicted the insurance industry could pay out between $10 billion to $20 billion.

But the largest disaster modeling company, Risk Management Solutions Inc., said Nov. 2 it was "too early to provide a reliable estimate of the total insured losses."

"The speed of restoration of power and pumping out of floodwaters from towns and transport systems remain major unknowns," said RMS Vice President Claire Souch in a statement. Both factors "will play a significant part in the ultimate loss."

In line with Moody's, XL Chief Executive Michael McGavick said on the conference call that Sandy wouldn't be "a capital event for the industry, at least based on what we are seeing so far."

But Sandy "may change the industry's perception of risk" in the Northeast, he said. "I believe the underwriting community will have to rethink with care what they should charge for risks in a region with such a complex concentration of values exposed to such storms."

XL executives said it was too soon to estimate their company's losses from the event.

Mr. Veghte said a $20 billion industry pricetag would be a "significant loss" to the reinsurance industry, which provides backup coverage to protect insurers from large losses.

"I would have to expect year-end pricing to be impacted," he said.

And he reminded investors that Sandy was no longer a hurricane when it made landfall.

"This loss really highlights the concentration of values in the region," Mr. Veghte said. "A loss of perhaps $20 billion to the industry, or above, from a storm that was classified as post-tropical cyclone as it came ashore is remarkable."