The majority of damage following Hurricane Isaac seems to be focusing squarely on losses following flood , not wind, thus moving the financial responsibility from the private market and catastrophe bonds to the publicly funded National Flood Insurance Program.
Isaac reach land Wednesday morning as Category 1 hurricane and remained at the level by afternoon with maximum sustained winds of 75 mph, according to the National Hurricane Center. The storm is heading slowly northwest at 6 mph and is expected to weaken to a tropical storm later in the day.
Insured losses from the private market — given that covered wind damage remains limited — is expected to be between $500 million and $1.5 billion, according numbers from catastrophe modeling firm Eqecat as cited by a Reuters report.
That’s good news for private market reinsurers since any losses below $1 billion are uniquely to trigger most reinsurance covers, modeling firm Kinetic Analytics told Bloomberg, and would continue a year-long pattern of reinsurers avoiding weather related losses.
The catastrophe bond issued by Louisiana Citizens Property Insurance Corp. may also avoid a triggering event. The $125 million Pelican Re bond, which was issued by the state-backed insurer earlier this year — has an indemnity trigger protection against losses tied only to wind damage on a per occurrence basis. Given that it has a reported $200 million attachment point, it’s debatable whether Category 1 Isaac alone could act as a trigger for the bond.
But the federally -backed NFIP program may not be as lucky in avoiding losses since Hurricane Isaac is turning out to be a catastrophic flood event.
Rains will cause significant lowland flooding with maximum rainfall amounts of 20 inches possible in southeastern Louisiana, Mississippi, southern Alabama, and the western Florida panhandle, according to catastrophe modeling firm AIR Worldwide.
“This is a slow-moving storm and heavy rains of 2-4 inches per hour are expected to continue, which would cause flooding to continue in the northern Gulf Coast through tomorrow,” said Dr. Tim Doggett, principal scientist at AIR in a statement.
Since flood damage is generally not covered under standard homeowners, the NFIP would be responsible for flood insurance covers losses resulting from heavy or prolonged rain, coastal storm surge and failure of levees or dams, according to the Insurance Information Institute.
That could pile on even more losses for the federally-backed insurer. Latest statistics put the flood insurance program an nearly $17 billion in the red.
Ironically, legislation for reauthorizing and extending the NFIP singed on July 30 includes a provision known as the COASTAL Act, which was sponsored by Louisiana Senator Roger Wicker (R-Miss.) that seeks to resolve the “wind-vs.-water” conflict.