RMS Expects Economic Loss to Exceed $100 Billion from Hurricane Katrina and the Great New Orleans Flood

Initial Hurricane Storm Surge Leads to Second Flooding Catastrophe When Levees are Breached in New Orleans
 

Newark, Calif. – September 2, 2005 – Risk Management Solutions today announced that the economic loss from Hurricane Katrina and subsequent flooding in New Orleans is expected to exceed $100 billion. Losses are resulting from two separate catastrophic events: first, the landfall of Hurricane Katrina in southeast Louisiana and coastal Mississippi on August 29 causing extensive wind and coastal surge damage; and second, the Great New Orleans Flood which has resulted from failure of the levee systems that protect New Orleans. At least 50% of total economic loss is expected to come from flooding in New Orleans, in addition to hurricane losses from wind and coastal surge, infrastructure damage, and indirect economic impacts. RMS issued preliminary insured loss estimates of up to $25 billion on Monday for Hurricane Katrina, prior to evidence of levee failure and flooding in New Orleans that was reported on Tuesday, August 30.

The 2005 Great New Orleans Flood has developed into the most damaging flood in U.S. history. RMS currently estimates that at least 150,000 properties have been flooded, surpassing the previous U.S. record from flooding and levee failures on the Lower Mississippi river in 1927, which inundated 137,000 properties. Hurricanes of category 4 or 5 strength are well-understood to occur in this region of the country, yet the levee system in New Orleans was designed only to protect against a category 3 strength storm. The insufficient level of flood protection offered by the city’s levees has been exacerbated by shortcomings in preparedness.

“The economic and insurance consequences of the 2005 Great New Orleans Flood will depend highly on how quickly authorities can respond to the event,” said Laurie Johnson, vice president of technical marketing at RMS, who is responsible for the company’s catastrophe response services and reconnaissance. “The speed at which existing pumps are reactivated and additional pumping capacity is added will determine how rapidly the flood waters are removed. But this is only the first step in restoring services to flooded areas of the city.”

The value of physical property in the flooded areas is approximately $100 billion. While the majority of property damage occurs once flood waters enter a structure, prolonged immersion of wooden residential buildings in warm polluted water will lead to rapid deterioration requiring an increasing proportion of the building stock to be completely replaced. There will also be significant costs associated with land and building decontamination.

Losses from business interruption and displacement of residents are highly dependent on the duration of the flooding. RMS estimates that the costs of interrupted economic activity exceed $100 million per day. There is also some risk that businesses may choose to relocate if they are unable to return in a timely manner, impacting the city’s long-term economic recovery.

The nearest historic analog to the 2005 Great New Orleans Flood is the 1953 flood in the Netherlands, also caused by a major wind driven storm surge that overwhelmed poorly maintained defenses protecting land below sea-level. The 1953 Dutch flood led to more than 1,800 deaths and the inundation of 47,000 properties. It took six months to pump out all the water from the flood bowl.

RMS has representatives available for comment in London, New York, and California.

Editor's Note:

It is widely recognized that Hurricane Katrina has numerous sources of loss, from the offshore and onshore wind and storm surge effects to the devastating flooding in New Orleans. RMS is modeling the flooding in New Orleans as a separate and distinct physical phenomena from the wind and storm surge effects. This is due to fact that the flooding was a result of the failure of the levees. RMS traditionally models hurricane related flooding from storm surge only.

Insurance losses from Hurricane Katrina's second landfall will be extensive, and assessing these losses will be a complex undertaking due to the impacts across multiple classes of business, the overlap of wind, storm surge, and flood damage in many of the most severely-affected areas, and extensive business interruption and demand surge. It is important to note that while RMS has modeled the physical effects of the wind and surge separately from the flooding, we are not taking a position on how insurance and reinsurance claims should be handled regarding the definition of an event. Individual insurance and reinsurance contracts will determine how claims will be handled in this regard.