By Kelley L. Allen

Posted: November 1, 2012

Primary insurers could have to pay more than expected as homeowner deductibles in most affected states won’t apply and loss estimates climb to $15 billion.

Sandy came ashore on the New Jersey coast as a tropical cyclone that caused disastrous coastal flooding, left 8 million without power and caused at least 47 deaths in the U.S. Overall, the storm could become the second-costliest for the country, second to Hurricane Katrina.

Initial damage estimates forecast losses similar to Hurricane Irene in 2011, at between $4 and 5 billion, with primary writers expected to assume the brunt of those losses. In the ensuing week, however, loss estimates have risen as high as $20 billion.

As losses mount, storm semantics have prompted news that deductibles will not apply for homeowners in several states affected by Sandy. The Maryland Insurance Administration has said homeowner deductibles will not apply in that state since the National Weather Service did not issue a hurricane warning. So far, deductibles also will not apply in New Jersey, New York and Connecticut, since NWS downgraded Sandy from hurricane status before the storm came ashore.

Hurricane deductibles typically require a payment between 1 and 5% of a property’s value, and go into effect when a storm has sustained winds of 74 mph or more. The lack of deductibles means insurers will have to pay out greater amounts.

While the U.S. property-casualty sector is considered flush with cash, its stocks have seen a 5% decline since news of Sandy’s potential destruction hit. And according to one Morgan Stanley analyst, the industry could see its earnings fall by 26%.

Disaster modeler Eqecat is forecasting losses for private insurers of up to $15 billion. Some estimates put that number at $20 billion. Those estimates do not include payouts from the National Flood Insurance Program (NFIP), which is administered by FEMA.

State Farm Insurance, the largest homeowner policyholder along the eastern seaboard, has seen about 24,500 claims since the storm. Most of those claims are in New York, with 7,500, followed with 5,000 in New Jersey and another 1,500 in Virginia.

Writers of federal flood premiums last year had $342.8 million written in the tri-state area, while the property-casualty industry as a whole in 2011 wrote $2.8 billion in federal flood direct premiums, according to SNL. Of the coastal areas hardest hit by Sandy, about 90% of the coastal housing properties in Ocean City, Md. are insured, while 1% of the coastal housing properties in New York are.

Commercial properties, meanwhile, are only insured through the federal program for up to $500,000 in losses. And auto losses are not covered through the NFIP.

FEMA’s flood program, meanwhile, has at least $45 billion in policies in the tri-state area. But the agency may not have enough to cover claims made through the NFIP, as it still owes the U.S. Treasury about $18 billion from Hurricane Katrina losses.

A look at the numbers

New York City has about $2.7 trillion in coastal properties insured through the federal flood program. Neighboring New Jersey, meanwhile, had 230,708 flood policies written as of September 2011 with an insured value of $706.5 billion in 2012.