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Who Pays for Hurricane Sandy Damages? More Than Just Your Insurance Company


Reinsurers, a.k.a., insurance for insurance companies, will foot a large portion of the Sandy bill. So will taxpayers.

So reinsurers cover insurance companies. But even reinsurers need backup. To hedge against extreme risks, reinsurers and insurers issue catastrophe bonds to investors, who receive handsome yields and get their principal back if nothing occurs over the life of the bond. However, in the event of catastrophes ("cats" in insurance-speak), their money is surrendered to reinsurers and insurers who use the money to pay claim-holders.

The Role of Catastrophe Bonds

Does that mean that the average investor is ultimately footing the bill for Sandy? Not quite. Though there are about 14 cat bonds worth some $3.6 billion that are exposed to Sandy, "the current estimates of insured losses are not enough to trigger full payouts from any exposed bonds," Antonio Guevara-Mazariego of cat bond broker Tullett Prebon, told Reuters. Even Katrina only partially triggered one cat bond that covered the Gulf region.

Reinsurance companies apparently have more than enough capital to manage losses incurred by Sandy, thanks to strong earnings through the first three quarters, said ratings agency Standard & Poor's in a report, so they wouldn't need the financial assistance of cat bonds anyway.

"In our view, based on current industry loss estimates, the effect on ratings for the P&C (re)insurers and affected catastrophe bonds should be minimal," S&P, who did point out that Sandy losses will probably affect reinsurers' fourth-quarter earnings, surmised. The agency, however, cautioned that "these loss estimates could, and probably will, change and that uncertainty about the business interruption and contingent business interruption claim amounts is very high."

Business Interruption Losses Might Pile Higher Than Damages

Alex Henlin, another attorney from Edwards Wildman with expertise in reinsurance, agrees that the more significant claims from Sandy might come from the business interruption front. While a property insurance policy typically only covers the physical damage to the business, business owners usually will also purchase business interruption insurance, which protects the loss of income, calculated as the profits that would have been earned, that a business suffers after a disaster.
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