With a year's worth of perspective and hindsight on Hurricane Sandy's impact, some in the insurance industry now view the storm as a wake-up call and a warning shot for the damage potential of a Northeast windstorm.
The storm reinforced on the insurance industry lessons that carriers, brokers and insureds are taking to heart to better prepare for a similar event. A Northeast hurricane had been a risk the insurance market was aware of for some time, but the experience with Sandy made it real.
"We know it was exposed, but I think to actually see the extent of water, and to see the extent of damage, was an eye opener for a lot of people," said David Passman, national director of property claims for Willis North America, of New York City. "You got hit in the face with the pie. It wasn't a hypothetical modeling situation anymore. The fact is that these buildings were underwater."
Robert Hartwig, president of the Insurance Information Institute, said the industry had been warning of a Northeast hurricane for years before Sandy struck. He said 2011's Hurricane Irene was a "warning shot" and Sandy was just a larger one. "It's very easy to imagine an event that could produce far more damage, particularly if it was an event that had more severe winds," Hartwig said.
Sandy, which made landfall on the evening of Oct. 29 near Atlantic City, N.J., hammered the coastal areas of New Jersey and New York, racking up insured damages of about $18.8 billion, with another $7 billion of insured losses attributable to the National Flood Insurance Program Sandy pushed massive storm surge into New York City and the New Jersey shore, where the recovery continues.
"I think from a storm surge or flood point of view, Sandy was a worst-case event," said Peter Raab, head of property underwriting in the regional clients business unit for Munich Re America. "From a wind point of view, it was definitely not."
The storm emphasized that weather events are difficult to predict and that models have shortcomings, Raab said. Sandy's flooding was a big topic following the storm, he said, adding insurers still aren't quite sure how to underwrite that risk.
"One thing we recognized is that flood risk, storm surge risks, are very difficult to underwrite," Raab said. "We don't understand enough as an industry at this point in time, and that we will use data and the loss information from Sandy to understand and to learn more about the flood risk from that event."
Sandy spotlighted the country's exposure to floodwaters and the "flawed" way in which protection for that exposure is written on homes, said J. Eric Smith, president and chief executive officer of Swiss Re Americas. The NFIP has low penetration and policy limits that "are rather low," Smith said. The government should court more input from private market insurers on how to make the NFIP better and potentially find a better solution to flood coverage in the United States, Smith said.
Sandy's floodwaters also presented confusion on some commercial policies because the wording "wasn't exactly clear" about classification as flood or storm surge, said Duncan Ellis, U.S. property practice leader for Marsh Inc. In some cases, Ellis said, policies were silent on the issue. Since the storm, Ellis said he's been urging clients to know in detail how their policies would respond in the event of a claim.
"We've all seen these losses now and understand about flood and windstorm and storm surge and looking at the damage that it can cause," Ellis said. "What I say to insureds is ask the additional few questions. Say, 'how would this policy respond in the event of the following?' Ask some of those scenario-type questions, because I think that's important. Know what you're buying. And the insurance companies, know what you're selling."
The extent of damage from surge on commercial and municipal properties was surprising to some in the industry, Smith said. Surge damage came not only from Sandy's "perfect storm" attributes, but also from rising sea levels and the amount of infrastructure that's built "right up at the sea's edge," Smith said.
"I think that's one of the wake-up calls from Sandy --- how exposed we are with our subways and our commercial buildings, with all these sub-parking structures, and what happens when the water comes in," Smith said. "Now, we're seeing the results of wiring that gets eaten up by salt water."
Electrical equipment and wiring compromised by Sandy's corrosive floodwaters was cited in September as the cause of a fire that destroyed dozens of businesses along the boardwalk in Seaside Heights, N.J., and Seaside Park, N.J. In Lower Manhattan, some real estate owners were forced to deal with salt water damage early on and some tried to move electrical equipment to higher floors following Sandy, Willis' Passman said.
"We have greater appreciation of why somebody, 300 years ago, actually named it Water Street," Passman said of the Lower Manhattan Street. "There was very little wind-driven damage. Most of the claims we saw were damage to mechanical and electrical systems as a result of flooding and storm surge into basements and mezzanine areas."
Along with contract wording, insurers and insureds are reevaluating business interruption coverages following Sandy, said Aaron Davis, a managing director in Aon's national property practice, who called Sandy a wake-up call in terms of the size of the insured losses. From a loss perspective, there were "a lot of surprises" from Sandy associated with business interruption covers, Davis said.
"A lot of our clients are spending time getting a better handle on their business interruption values," Davis said. "They don't want to overstate them and pay additional money for them. Conversely, they don't want to understate them and surprise their insurance panel."
The insurance industry in the years running up to Sandy experienced a progression of storms that gained in intensity, said Bernard M. Flynn, president and CEO of New Jersey Manufacturers Insurance Co. That progressive experience, which allowed NJM to fine-tune its catastrophe-response plan before Sandy struck, dated back to a March 2012 nor'easter, Flynn said.
"That taught us a few lessons," Flynn said. "We learned them well, and that led us to Tropical Storm Irene in 2011. We had 21,000 claims as a result of Irene and, again, we handled them well ... then Sandy came along ... we were ready for a storm like Sandy."