The Long and Winding Road

Insured losses, Weisbart estimates at press time, could be in the $3 billion–$6 billion range, with the uninsured losses coming in substantially higher. “Typically they are about twice the insured loss,” he says. “In this case,” he predicts, “they will be closer to three times the insured loss, because more of the damages would be of the uninsured type. Looking at the low end, they will probably total $12 billion and perhaps up as high as $18 billion or so.” He adds that this is a rough guess so soon after the event. Additional damage can still occur: sinkholes, collapsing buildings with weakened foundations, flood waters still rising in already swollen rivers.

Asked if some risks could become uninsurable, particularly in coastal areas subject to increased danger of catastrophic flooding, Weisbart says, “As an economist, I would prefer to say that if the market is functioning properly, a company will offer coverage at a cost no policyholder is willing to pay—which would be the equivalent of being uninsurable. In that case, risk would be properly communicated from the prospective insurance company to the prospective insured.”

Advisors, he adds, should be aware of two things: the risks inherent in client portfolios if they invest in insurance, and the need for adequate coverage of risks they may not have considered. While it’s increasingly important to know where an insurance company’s risks lie as an investment, it’s also increasingly difficult. A company might have 5%-10% of the market in a given area, but whether that area is prone to catastrophic losses is a vital piece of information—and so is the type of risk. Vermont, for instance, is not known for the kind of flooding Irene brought. Another aspect of that same issue, Weisbart says, is “that some direct carriers have exposure by offering some reinsurance on the side. So even if their direct line is pretty well protected, there might be risk coming in the back door.”

Weisbart concludes, “You have to recognize [the earthquake and Hurricane Irene] amounted to essentially an invasion of black swans, with a whole flock of them coming by.” However, while it may be an unusual series of events, he points out that “really what’s necessary is an enterprise-wide assessment of risk that each business, small or large, should undertake, and […] a conversation with an agent or broker about what can be done.”