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Fitch: Sandy Floods May Cause Big Business Interruption Losses

Source: Fitch

Posted on 31 Oct 2012 by Neilson

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Business Interruption and SandyHurricane Sandy made landfall yesterday evening as a post-tropical cyclone on the southern coast of New Jersey near Atlantic City with top sustained winds of more than 80 mph. The storm's effects are being felt across the entire coastline of the Mid-Atlantic region, up through New England and into inland areas as far as the Great Lakes area.

EQECAT, Inc.'s initial insured loss estimate is between $5 billion-$10 billion, with economic damages of approximately $10 billion-$20 billion. At the low end, losses from Hurricane Sandy would roughly equal losses generated by Hurricane Irene, which struck the East Coast in August 2011. However, due to the widespread nature of the storm, it will take some time for catastrophe modeling firms and local loss adjusters to accurately estimate insured losses.

Fitch Ratings expects that flooding from excessive rainfall and high storm surge will be a substantial component of damages from Sandy, in addition to damage from strong winds. As such, it is important to note that homeowners' policies cover wind losses, but generally do not cover flood losses. Conversely, many commercial policies cover both wind and flood losses, as do crop insurance policies.

While many lines of insurance will be affected, including property and auto, there is the potential for significant business interruption (BI) and contingent business interruption (CBI) losses related to the flooding as the affected areas work to restore power and resume operations following the storm. The massive storm is impacting a wide variety of businesses in densely populated areas, including retail, corporate offices, transportation, manufacturing, and energy plants.

Extensive BI and CBI losses were experienced by the insurance industry last year in both the Japanese earthquake and tsunami and Thailand floods, as they accounted for a considerable portion of commercial and industrial losses. Fitch also notes that these events demonstrated the extent to which BI and CBI losses have been underestimated in the modeling and underwriting of risks.

In order to incur a BI or CBI loss, an insured must suffer an actual loss of income from the suspension of operations. In the case of BI, the interruption must be due to physical loss or damage to its own property as a result of a covered cause of loss. A BI claim can also be triggered if the work location is not accessible due to a "civil authority" order telling people to stay out of an area. CBI provides an additional protection that covers loss of income when the insured's operations are disrupted by a supplier and covers the same perils as the main policy of the insured. However, the majority of companies do not purchase CBI policies.

Coverage typically begins following a waiting period, most often 72 hours, and continues for the length of time it takes to repair, rebuild, or replace the damaged or destroyed property with reasonable speed and similar quality. Thus, the ultimate insured losses from BI and CBI will be partly predicated on the speed with which businesses resume operations. It is also important to note that the vast majority of BI and CBI coverage purchased in the U.S. is included as part of the insured's property policy, and are thus included within the overall property policy's coverage limits.

For detailed market share information listing the top 10 insurers by direct written premium for coastal states in both personal and commercial property insurance, see Fitch's report "2012 Hurricane Season: A Desk Reference for Insurance Investors," dated May 24, 2012. These statistics enable readers to quickly assess individual insurer's potential exposure to a major storm before loss estimates are released.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings.