How Hurricane Katrina's costs are adding up

Martin Wolk Chief economics correspondent • Profile • E-mail

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.

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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.

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