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How Hurricane Katrina's costs are adding up

It will be months before the cost of Hurricane Katrina is fully known, but insurance industry experts agree  losses will far exceed $100 billion, making it the nation's costliest natural disaster.
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It will be months -- or even years -- before the cost of Hurricane Katrina is fully known, but insurance industry experts are refining their estimates and agree losses will far exceed $100 billion, making it the nation's costliest natural disaster.

Published estimates of damage and other economic losses stemming from the massive storm vary widely, ranging from a low of $14 billion in insured damages to a high of $225 billion in federal outlays requested by Rep. William Jefferson, a New Orleans congressman.

A closer examination of some of the estimates brings the total of insured and uninsured damages to well over $100 billion and possibly close to $200 billion, although it is still too soon for much precision.

“We know only one thing for certain, and that is that this is a devastating event for the people in the area,” said Douglas Holtz-Eakin, director of the Congressional Budget Office. “Beyond that there is an awful lot to learn before we know the economic impact and budgetary impact.”

The non-partisan agency last week estimated the hurricane’s impact could cut the nation’s gross domestic product by 1 percent in the second half of next year, or about $60 billion, although private economists generally put the impact at about half that level. But much of that likely will be offset next year by private and government spending to repair and rebuild the affected region.

Congress already has allocated $62.3 billion for rescue, recovery and repair from Hurricane Katrina, and analysts expect the total to go far higher. Add in at least $40 billion in private insurance payments plus billions more in state funds and federal flood insurance, and “it’s over a $200 billion event by the time you’re done with this,” said David Wyss, chief economist for Standard & Poor’s.

To break down some of those costs, the best sources so far are firms that specialize in helping the insurance industry manage and underwrite “extreme risk” events. Using computer models based on the size of the storm and backed up by engineers who have begun inspecting damage on the ground, these firms are estimating the insurance industry will pay out anywhere from $15 billion to $60 billion, depending on what is counted.

These estimates generally exclude damage from the extensive flooding unleashed by Katrina, most of which is either uninsured or covered by the National Flood Insurance Program. Experts say the flooding alone will add $15 billion to $20 billion to the cost of the disaster.

“Total economic damage certainly will be well in excess of $100 billion,” said Jayanta Guin, vice president for research and modeling for AIR Worldwide, a Boston-based risk modeling firm. “There was tremendous damage to infrastructure.”

AIR Worldwide has published an estimate that Katrina will cost the insurance industry $17 billion to $25 billion, but that excludes the insured cost of business interruptions, environmental damage and offshore assets including oil platforms and pipelines.

But even counting only the damage from the hurricane’s intense wind and flood surge, it seems clear Katrina will exceed the damage caused by Hurricane  Andrew in 1992, which cost the insurance industry $21.5 billion in inflation-adjusted dollars.

“This is analogous to Hurricane Andrew,” said Tom Larsen, senior vice president of EQECAT, an Oakland, Calif.-based risk-management firm. “If we include all these components, it potentially will exceed Andrew. This is a significant loss to the insurance industry.”

EQECAT estimates Katrina caused $14 billion to $22 billion in wind-related damage to the Gulf Coast, plus up to $2 billion in damage when it made initial landfall in Florida as a relatively modest Category 1 hurricane.

Those figures exclude insured and uninsured flood damage, which Larsen said could top $20 billion, and they exclude damage to the oil industry infrastructure that Larsen put at $6 billion to $10 billion. Adding  those back in would bring the estimate of privately insured damage back up to $20 billion to $35 billion.

A third company, Risk Management Solutions, estimates that private insurers will pay out $40 billion to $60 billion in losses stemming from the hurricane and flooding and that total economic losses will exceed $125 billion. 

At least part of the reason for the higher estimate was a “fairly aggressive business interruption scenario,” said Laurie Johnson, a vice president at the risk-management firm. Even New Orleans businesses that might have been undamaged by the storm and flood might not be back in business for a long time because the city is evacuated, she pointed out.

Johnson also said the firm is assuming Louisiana insurance officials will ask insurers to pay so-called additional living expenses for insured homeowners.

The costs of business interruption and homeowners living expenses could total $10 billion, Johnson said.

Within broad parameters, the impact on the insurance industry appears to be fairly well-known, although costs could creep higher, said Wyss, of Standard & Poor’s.

But the final cost for federal taxpayers far less certain.

After Congress passed the second tranch of its initial $62 billion in allocations, the White House budget director suggested that would be enough to carry the Federal Emergency Management Agency through the next “couple of weeks,” Holtz-Eakin said.

“That certainly does suggest we are not done,” he said. “We don’t know the stopping point.”

Todd Metcalf, legislative counsel for Jefferson, the New Orleans congressman, said numbers in the range of  $150 billion to $200 billion have been “consistently tossed around here for the last week and a half.”

That would include the costs of building replacement housing for up to 200,000 families, tax incentives to encourage private reinvestment and a vast amount of infrastructure replacement, Metcalf said.

While the forced evacuation of a major American metropolis is unprecedented in modern times, the size of the storm and its impact is not beyond the range of what insurance industry experts generally expect in their long-range planning, said Larsen of EQECAT.

The last time the U.S. was hit by a wave of strong hurricanes, in the 1950s and 1960s, there was not nearly as much coastal development as there is today, he said.

“We tend to be more coastal and certainly more affluent, so that increases our exposure,” he said.

“As tragic and as severe as these losses are, they are not exceptional,” he said. “People are looking out 10 to 20 years, and these are within the expected range of losses.”