Hurricane Ike (Offshore)

Pre-Landfall 1 | Summary
Posting Date: September 12, 2008, 2:00:00 PM

As of 2:00 pm EDT, Hurricane Ike is located about 165 miles southeast of Galveston, Texas. Maximum sustained winds have risen to 105 mph and the storm is moving to the west-northwest at 12 mph. Ike continues to be a very large system. Hurricane force winds extend out to about 120 miles from the center and tropical storm force winds extend out some 275 miles. This means that residents on the Texas coast who have not yet evacuated should begin feeling the effects of Ike within the next several hours. There is still a possibility that Ike may yet strengthen. The National Hurricane Center (NHC) assigns a 29% probability to Ike's achieving Category 3 status before landfall—an upgrade that would require only a slight increase in wind speed. However, there is only a 2% chance that Ike will achieve Category 4 status. Still, should Ike arrive on the coast of Texas as a Category 3 hurricane, it will be the first time since 2005’s Wilma that the U.S. has experienced a major hurricane landfall. Ike continues to be steered by a ridge over the southeastern U.S. Once it reaches a break in the ridge Ike should turn northward and, ultimately, to the northeast. The NHC forecast track takes Ike to Galveston and Houston early tomorrow. Although Ike is likely to track south and west of the heaviest concentrations of offshore platforms and rigs off the Louisiana coast, there are still significant assets in the storm's path. According to the Minerals Management Service, evacuations have shut 97 percent of Gulf crude production and 93 percent of natural gas output in the Gulf of Mexico. Wholesale gas prices shot up by some 30% yesterday as a result. Ike is also headed for the largest concentration of onshore oil refineries and petrochemical plants in the U.S. AIR’s industry exposure database includes a comprehensive database of industrial facilities broken down by building, equipment, inventory, contents and business interruption. For offshore exposures in the Gulf of Mexico, AIR estimates ground-up losses (prior to consideration of any insurance terms and conditions) between $2.1 and $4.7 billion with an expected (mean) value of $2.6B. The loss estimates in this posting are based on information in the National Hurricane Center’s 5:00 a.m. advisory on Friday, September 12. These losses reflect wind and wave damage to the platforms and direct and indirect loss of revenue attributable to reductions in oil and gas production. AIR estimates insured losses will be between $600 Million to $1.5 Billion with an expected (mean) of $800 million. AIR’s expected, or mean, loss is truly the expected value of the full loss distribution and will not exactly match the “50% probability loss” in the posted scenarios, since the latter is the median loss scenario. The wide range in loss estimates in this pre-landfall posting is attributable to uncertainty with respect to the storm’s future track and intensity as it approaches landfall. The lower end of the loss range reflects less intense events passing over regions of offshore assets that have relatively low exposure. The higher end of the range reflects higher intensity events making a more direct impact on offshore assets. The NHC forecast “cone of uncertainty” does not capture the full range of possibility, though it serves as an excellent guideline for what can be expected under the forecasted conditions. Additional information on AIR’s loss estimates for offshore assets: AIR maintains a very detailed industry exposure database (IED) of offshore assets in the Gulf of Mexico. This database includes not only location and type of offshore platform but also includes the physical characteristics of each asset that are important for estimating physical damages and loss of production. The model has been thoroughly validated with the historical data from hurricanes Katrina, Rita and Ivan. Since the 2004-05 hurricane seasons, the policy conditions for these risks have changed significantly. In particular, underwriters have restricted coverages, especially for business interruption in order to minimize exposure. The new market conditions add uncertainty in estimating a total industry wide insured loss. The industry groundup (GU) losses are generated based on AIR’s offshore Industry Exposure Database. GU losses include total damage and loss potential for the four primary coverages for offshore, namely Physical Damage (PD), OEE (Operator’s Extra Expense) ROD (Removal of Debris), and BI (Business interruption). These losses are posted on the ALERT event summary page and are also provided in the form of CATRADER event sets. On average, the BI losses account for about 40 to 45% of the total GU loss. A significant proportion of this GU loss is not going to be covered by insurance carriers because of the policy terms that are currently in place. The BI contribution and total insured losses are computed by assuming a waiting period of 45 days and a limit of 180 days. This range reflects uncertainties associated with estimating the meteorological parameters of the storm, the physical damage to offshore assets, loss of production and the impact of policy terms in reducing the insured’s losses. Note that current users of the AIR’s offshore model will be able to accurately compute for their portfolios of assets the insured losses using the current policy conditions, which may deviate from the average conditions applied for the entire industry to obtain the insured loss estimates reported above. GU loss estimates may appear to be high for the following reasons: • The current oil price considered in AIR’s BI loss estimation for Ike is $100 per barrel. In reality, the actual payouts in most policies will settle for considerably less than $100 per barrel. At the time of Katrina oil was approximately $50 per barrel. Thus if Katrina had occurred at today’s oil prices its insured losses would have been higher. • AIR's BI ground up loss takes into account downtime because of the mandatory evacuation orders and shut-in (waiting time) in the Gulf, which are not covered by the insurance policy (deducted). • AIR's ground up BI loss covers BI and CBI (Contingent Business Interruption) as well, but the recent changes in offshore policy terms after Katrina and Rita tend not to cover CBI, which becomes very significant in the course of a large event. • The combined single limits by individual platform and account limits in current policies have changed since Katrina and Rita in order to minimize the insured’s losses. As clients review their estimated losses from this storm, AIR recommends to always communicate the range of loss estimates produced by the “All simulated scenarios” event sets provided on the ALERT site, rather than any single loss estimate or maximum estimate.

Pre-Landfall 1 | Downloads
Posting Date: September 12, 2008, 2:00:00 PM