A recurrence of the 1938 Long Island Express hurricane today would result in estimated insured losses in excess of $35 billion, while a similar storm tracking further to the west would result in insured losses of more than $100 billion.
ThatÃ¢â‚¬â„¢s a key takeawayÃ‚ from a report by Karen Clark & Co (KCC) marking the 75th anniversary of the 1938 Great New England hurricane.
In a press release Karen Clark, president and CEO, KCC, says:
In the Northeast, itÃ¢â‚¬â„¢s not a question of the intensity but of the storm track. It will only take a Category 3 hurricane with the right track to cause industry losses far exceeding anything weÃ¢â‚¬â„¢ve seen to date. This type of storm could also result in losses well above many insurersÃ¢â‚¬â„¢ PMLs.Ã¢â‚¬
The KCC report notes that such a storm could make landfall anywhere along the Long Island, Rhode Island or Massachusetts coastlines and the different landfall points would result in dramatically different industry losses and damages.
This is because hurricanes are Ã¢â‚¬Å“right handedÃ¢â‚¬ in the northern hemisphere, with the strongest winds occurring from a few miles to 50 miles to the right of the storm center. Hurricanes that make landfall further to the west will cause greater damage because more of the right, or east, side of the storm will be over highly populated areas, according to the report.
Historical records show that the Northeast had felt the impact of several major hurricanes before 1900. Given this history, KCC says itÃ¢â‚¬â„¢s reasonable to assume the 1938 storm is a 100 year type event for the region and has an estimated one percent annual probability of occurring.
However, while insurers have relied on probable maximum losses (PMLs) derived from catastrophe models to quantify and manage hurricane risk, KCCÃ‚ points outÃ‚ that the PML approach can give a false sense of security by masking exposure concentrations that can lead to solvency-impairing events.
Instead, KCC has developed the Characteristic Event (CE) methodology of Ã¢â‚¬Å“floatingÃ¢â‚¬ the 100 year storms along the coast and estimating the resulting losses. While providing probability information, the CE method also clearly identifies exposure concentrations and Ã¢â‚¬Å“hot spots,Ã¢â‚¬ KCC notes.
Tools that rely on the historical record alone can significantly underestimate the chances of this type of an event and potential Northeast hurricane losses. Insurers shouldnÃ¢â‚¬â„¢t assume, as the forecasters did in 1938, that a major storm will not follow a particular path simply because there is no record of such an occurrence.Ã¢â‚¬
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