Only a decade ago, Hurricane Katrina—the costliest natural disaster ever faced by the insurance industry—struck the United States, causing historic damages along the Gulf Coast, inundating New Orleans, and leading to the deaths of 1,464 people (Louisiana Department of Health figure).
What if history repeats itself, and a storm with the size and intensity of the 2005 hurricane once again hits the Gulf Coast? Are we ready? Given today’s exposures and with enhanced flood defenses for New Orleans, what levels of damage might be expected? Using a cutting-edge hurricane model that includes a new hydrodynamic storm surge component, it’s possible to test two scenarios for Katrina-like landfalls with today’s exposures. The first scenario estimates potential insured gross loss and ground-up loss assuming widespread failure of New Orleans’s flood defense system. A second scenario estimates potential losses under an assumption that the city’s extensive flood defense system weathers the storm and isn’t breached.
In the wake of Katrina, the National Hurricane Center estimated the New Orleans area and Mississippi’s coast suffered $75 billion in storm damages. The Federal Emergency Management Agency (FEMA) National Flood Insurance Program paid $16.3 billion in claims from flood and surge-related damages, which nearly bankrupted FEMA’s program. Property Claim Services® (PCS®) estimated total insured payouts at more than $41 billion in six states: Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee. Payouts for Louisiana and Mississippi, the most heavily damaged states, were pegged at $25.4 billion and $13.8 billion, respectively. According to PCS, more than 1.7 million claims were filed, including nearly 1 million from Louisiana and 500,000 from Mississippi.
Yet much has changed along the Gulf Coast since Katrina devastated the landscape from southern Louisiana to the Florida Panhandle. Growth in exposure throughout the region, as elsewhere, has been limited in the last decade, in part because of the deep recession of 2008–2009 and its lasting economic aftermath. In Louisiana and Mississippi, the insured value of coastal property hasn’t increased as much as the insured value of property statewide since Hurricane Katrina, but the difference in percentage increases also isn’t dramatic (as shown in Table 1).
New standards in coastal construction have led to better resilience to hurricane wind and storm surge, while in and around New Orleans the complex flood protection system has lowered risks of flooding for the low-lying city. Risk of damage from substantial storms remains, however, and a hurricane with the intensity, size, and track of Katrina still could prove deadly and destructive.
Using the AIR Hurricane Model for the United States, a return of Katrina can be viewed in two scenarios to show the worst case (failure of the flood defense system) and hypothetical best case (defenses left intact).The losses reported use AIR’s high-resolution industry exposure database (IED) and reflect 2014 exposures. The modeled results are further refined by the hydrodynamic storm surge component of the U.S. hurricane model, which explicitly accounts for New Orleans’s current flood protection system and probabilistic failure scenarios for that system.
Despite the improvements reflected in the strengthened hurricane and storm surge risk reduction system built in and around New Orleans since 2005, the total elimination of risk isn’t possible. Knowing the insured gross loss and ground-up loss to all properties that might be expected if a Katrina-like storm were to strike today, given current exposures and failure of the upgraded levee system, can be revealing information that helps inform risk management.
In a flood defense failure scenario (as shown in Figure 1), New Orleans would again experience widespread flooding from three directions, with infiltration from Lake Pontchartrain from the north, the Intercoastal Waterway from the east, and the Mississippi River from the south. Lakeside neighborhoods and much of the downtown, as well as low-lying neighborhoods east of the Mississippi River—locales such as Arabi, Chalmette, Meraux, and Violet—again would be affected, some quite severely.
Figure 1. Surge depths for a storm with the characteristics of Hurricane Katrina with the New Orleans flood defenses failing (New Orleans outlined in white). Note that flooding also extends east along the Mississippi and Alabama coasts and Florida Panhandle. (Source: AIR)
Figure 2 (below) is a state-level comparison of modeled insured losses and ground-up losses, separated by wind and storm surge. AIR’s default storm surge contributions by line of business were used for the insured loss estimates, while the ground-up loss estimates account for 100% storm surge contribution across all lines of business.
Figure 2. Insured and ground-up losses by wind and storm surge for a storm with the characteristics of 2005's Hurricane Katrina, based on failure of New Orleans flood defenses. (Source: AIR)
As shown in Figure 2, surge losses exceed wind losses in Louisiana from an insurable loss perspective, demonstrating the catastrophic damage potential of storm surge. But insurance coverage for wind far exceeds that from flooding (including storm surge), which is why wind typically dominates from an insured loss perspective.
Significant growth in coastal exposure in Louisiana and Mississippi in recent years, coupled with subsidence in some of the areas around New Orleans, is contributing to the high vulnerability of both Louisiana and Mississippi coastlines to storm surge. With flood defenses failing, these conditions lead to a $59 billion insured loss total. This sum corresponds to a $105 billion ground-up loss, with Louisiana carrying the lion’s share in this overall loss.
With construction of its Hurricane and Storm Damage Risk Reduction System (HSDRRS), New Orleans faces a significantly reduced risk of flooding from a severe event, even from storms potentially more intense than Katrina. This second scenario looks at the impact of Hurricane Katrina striking New Orleans with its new defenses holding. AIR’s high-resolution hydrodynamic surge model reveals that the water levels in this simulated event remain well below levee heights, and, as shown in Figure 3 (below), the city would remain largely protected from flooding.
Figure 3. Surge depths for a storm with the characteristics of Hurricane Katrina with the flood defenses holding, with New Orleans outlined in white. (Source: AIR)
Figure 4 (below) shows a state-level comparison of modeled insured loss and ground-up loss by wind and surge. As with Figure 2, AIR’s default storm surge contributions by line of business were used for the insured loss estimates, while the ground-up loss estimates account for the storm surge contribution across all lines of business.
Figure 4. Insured and ground-up losses by wind and storm surge for a storm with characteristics of 2005's Hurricane Katrina, with the New Orleans flood defenses holding. (Source: AIR)
This scenario leads to an insured loss of $46 billion, with a corresponding ground-up loss of $71 billion. Louisiana continues to suffer the highest losses in this scenario, although with storm surge defenses holding, the insured loss total for Louisiana drops 29 percent from the first scenario, a decrease almost entirely based on the reduction in storm surge damage in the New Orleans area. In each scenario, loss estimates in coastal Louisiana (outside the city), Mississippi, and other impacted states are very similar.
The second scenario also underscores that wind is still the primary driver of insured loss, regardless of levee failure. Although the flood defense system can significantly mitigate storm surge damage in and around the New Orleans area, it cannot mitigate wind damage. Therefore, attention to wind mitigation strategies should remain critical for risk managers.
Hurricane Katrina was a landmark event that has provoked a new awareness in risk estimation and risk management, with numerous implications for the insurance and reinsurance industries—as well as for catastrophe modelers. This devastating storm redefined our concept of a modern “mega disaster” as a result of the extensive physical damages from wind and water and from the complexity of insurance issues that arose in its aftermath. The issues span handling of claims, demand surge, and flood insurance coverage.
Viewed as a case study, Katrina highlighted the effects of a large system-level failure, leading to sharper focus on the quality of exposure data and on business interruption and contingent business interruption exposures. The result has spurred advances in the science of modeling wind and storm surge. As tragic and destructive a storm as it became, Hurricane Katrina also brought an awareness of the value of preparation and planning—and the importance of modeling for improving risk management.