Counting the high cost of nature's fury

Widespread loss of power has businesses preparing for a long siege, write Mary Williams Walsh and Nelson Schwartz.

Widespread loss of power has businesses preparing for a long siege, write Mary Williams Walsh and Nelson Schwartz.

The cost of damage inflicted by hurricane Sandy could reach $US50 billion [$48.5 billion], and economists warned the storm could shave a half percentage point off the US's economic growth this quarter.

That's the estimate, according to EQECAT, which tracks hurricanes and analyses the damage they cause.

The flooding of New York's subways and roadway tunnels, and the extensive loss of business due to utility failures across the region were behind a sharp increase in the estimate, the firm said.

"The geographic scope of the storm was unprecedented, and the impacts on individuals and on commerce are far larger," said Tom Larsen, EQECAT's senior vice-president. "Lost power is going to contribute to higher insurance losses."

EQECAT predicted that New York would bear 34 per cent of the economic losses, with New Jersey suffering 30 per cent, Pennsylvania 20 per cent and other states 16 per cent. That includes all estimated losses, whether covered by insurance or not.

The share of the losses that will be covered by insurers is far from certain, as government officials, property owners and adjusters struggle to assess the destruction.

While the stockmarket, banks and other financial institutions were bank in business by Thursday, other sectors such as retailing, transportation, and leisure and hospitality face a much longer and more difficult recovery. In fact, with fuel in short supply in many areas and utilities warning that power may not be switched back on for a week or more in some areas, businesses found themselves preparing for the equivalent of a long siege.

FedEx, for example, was trying to rent fuel tankers for its trucks in New York and New Jersey as petrol stations run dry.

"We're reaching out to everyone who has a gasoline tanker that we can move to these areas," said Shea Leordeanu, a spokeswoman for the company. While FedEx had stocks of oil before the storm for generators, it was not prepared for the petrol shortages that caused long lines at stations.

"There has not been an impact yet but this is something we can see as an issue and we're concerned," she said.

As logistical problems mounted, and damage estimates surged, economists raised their forecasts of the storm's impact.

"I think the effect will be quite big," said Julia Lynn Coronado, chief economist for North America at BNP Paribas. "In the fourth quarter, we're probably looking at an impact of half a percentage point."

She said some of those losses would be made up in the first quarter of next year, as insurance reimbursements were distributed and homeowners and businesses rebuild.

Hurricane Sandy will rank high among disasters in terms of economic impact, but will not be at the top of the list, said Mark Zandi of Moody's Analytics. He estimated the losses would be less than half of those caused by the 9/11 terrorist attacks and from hurricane Katrina.

Moody's Analytics also put the impact in the $US50 billion range, with about $US12 billion in losses falling in the New York City metropolitan area.

About $US20 billion of that total is from lost economic activity such as meals not served in restaurants, cancelled plane flights and bets not placed in casinos. The rest, about $US30 billion, will be from property destruction, including damage to homes, cars and businesses.

EQECAT said it believed insurance would cover $US10 billion to $US20 billion of the total cost. Other losses would be borne by individuals and businesses, or covered by federal government programs like the National Flood Insurance Program. Much of the federal spending will be used to repair damaged public infrastructure, rather than for private property.

EQECAT said that if insured costs remained at the lower end of its predicted range, at $US10 billion, then about 60 per cent of the losses would be covered by homeowners' insurers. The remainder would be divided between auto insurers and commercial insurers.

If total insured losses rose to the higher end of its range, it would be because of costs like business-interruption losses, and in that

case commercial insurers would pay more.

They said this would depend to a great extent on how long power failures continued. There was no solid data yet on the number of transformers and power lines that had been knocked out. They added that in some cases, power might not be restored until well into December.

Moody's issued a report saying that the large US insurers had "diversified exposures and strong capital bases to withstand" payouts related to the storm.

But it added the costs could disrupt the capital bases of smaller, regional insurers.

State Farm, the largest writer of home and auto insurance in the region, reported having received nearly 25,000 homeowners' claims and 4000 car claims as of Wednesday. Those numbers are probably a fraction of the eventual totals. Some of the losses will not be recouped. For example, lost Halloween sales will be painful for some retailers, according to a separate analysis by Moody's.

"As shoppers in the affected regions focus on the storm, other discretionary spending will fall and not be recouped," Moody's said.

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