Hurricane Harvey likely to cost US economy tens of billions of dollars

10:48 | 31/08/2017 Global Economy

Hurricane Harvey's lashing across southern Texas is turning into an economic catastrophe - with the damage likely to stretch into tens of billions of dollars and an unusually large share of victims lacking adequate insurance, according to early estimates.

hurricane harvey likely to cost us economy tens of billions of dollars
A heavily damaged car lies abandoned after Hurricane Harvey hit Rockport, Texas on Aug 26, 2017 - PHOTO: AFP

Harvey's cost could mount to US$24 billion (S$33 billion) when including the impact of relentless flooding on the labor force, power grid, transportation and other elements that support the region's energy sector, said Chuck Watson, a disaster modeller with Enki Research.

That would place it among the top eight hurricanes to ever strike the US.

Many forecasters were hesitant over the weekend to make preliminary estimates for how much insurers might pay, potentially speeding recovery. Researchers were shifting from examining Harvey's landfall Friday as a roof-lifting category 4 hurricane to the havoc it later created inland as a tropical storm.

Typical insurance policies cover wind but not flooding, which often proves costlier. Blaming one or the other takes time.

hurricane harvey likely to cost us economy tens of billions of dollars
People flee rising floodwaters in Houston City of Texas state - Photo: Reuters

In the Houston area, rainfall already has surpassed that of tropical storm Allison in 2001, which wreaked roughly US$12 billion of damage in current dollars. In that case, only about US$5 billion was covered by insurance, according to Aon.

Those storms are dwarfed by Hurricane Katrina, which struck in 2005 and devastated New Orleans. By some estimates, it inflicted US$160 billion in total economic damage.

Most people with flood insurance buy policies backed by the federal government's National Flood Insurance Program. As of April, less than one-sixth of homes in Houston's Harris County had federal coverage, according to Aon. That would leave more than one million homes unprotected in the county. Coverage rates are similar in neighbouring areas. Many cars also will be totalled.

"A lot of these people are going to be in very serious financial situations," said Loretta Worters, a spokesman for the Insurance Information Institute. "Most people who are living in these areas do not have flood insurance. They may be able to collect some grants from the government, but there are not a lot, usually they're very limited. There are no-interest to low-interest loans, but you have to pay them back."

The federal program itself is already struggling with US$25 billion of debt. The existing program is set to expire on Sept 30 and is up for review in Congress, which ends its recess Sept 5. Investors Brace Costs still will likely soar for insurance companies and their reinsurers, biting into earnings.

As Harvey bore down on the coastline last Friday, William Blair & Co., a securities firm that tracks the industry, said the storm could theoretically inflict US$25 billion of insured losses if it landed as a "large category 3 hurricane."

Policyholder-owned State Farm Mutual Automobile Insurance Co. has the largest share in the market for home coverage in Texas, followed by Allstate Corp., which is publicly traded. William Blair estimated that, in that scenario, Allstate could incur US$500 million of pretax catastrophe losses, shaving 89 cents off of earnings per share.

Investors began bracing for losses last week. But many didn't believe that Harvey could wipe out bonds that were issued to protect insurers against storm damage in the region, according to Brett Houghton, a managing principal at Fermat Capital Management. His firm manages more than US$5 billion, with allocations to catastrophe bonds.

The Swiss Re Cat Bond Price Return Index dropped 0.44 per cent in the week ended Aug 25, the steepest decline since January. The benchmark is recalculated every Friday, so it's unclear how the debt performed as the storm continued through Sunday.

Reinsurers, which provide a backstop for primary carriers, also may get burnt. That group include Bermuda-based companies Arch Capital Group Ltd., Axis Capital Holdings Ltd. and RenaissanceRe Holdings Ltd., according to a note last week from Meyer Shields, an analyst at Keefe, Bruyette & Woods.

Businesses are probably better covered than individuals. Companies across the retailing, manufacturing, healthcare and hospitality industries will be seeking reimbursements from insurers for lost revenue during the storm and subsequent repairs, said Aon's Jill Dalton, who helps manage claims.

But for Texas's massive energy industry, it's still too early to project how badly the storm will disrupt supply and distribution. That's because the devastation keeps spreading.

"If it continues to rain, I just don't think the situation is going to get better any time soon," said Rick Miller, who leads Aon's US property practice. "In fact, it could get a lot worse."

Theo Straitstimes