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NEW ORLEANS—A massive new system aimed at reducing hurricane and storm damage risk in Greater New Orleans that was developed in response to the catastrophic effects of Hurricane Katrina will be completed soon, though its impact on insurance rates might take longer to be realized, some say.
The $14.6 billion Greater New Orleans Hurricane and Storm Damage Risk Reduction System was more than 97% complete late last year, with the U.S. Army Corps of Engineers hoping to finish the project by the end of June.
In late October, a group of insurance industry executives—and Business Insurance—toured many key features of the new risk reduction system with the corps.
The tour was organized by Warren Perkins, vp and risk manager at Boh Bros. Construction Co. L.L.C. in New Orleans, and was intended to educate the insurance market about the risk-reduction improvements coming online in New Orleans in hopes they'd affect the area's insurance pricing and capacity.
The 133-mile perimeter system is designed to withstand a 100-year event, with the corps having improved and strengthened nearly all the levees, floodwalls, pump stations and surge protectors along that perimeter.
Superlatives abound about the system: the largest drainage pump station in the world, the largest surge barrier of its kind in the world, the largest continuous placement of concrete since the construction of the Hoover Dam and so on (see related story).
“The system doesn't resemble what was here before Hurricane Katrina in terms of the level or risk reduction provided,” said Michael F. Park, chief of Task Force Hope in Louisiana, part of the Corps of Engineers' Mississippi Valley Division.
The nearly completed risk-reduction system focuses on stopping storm surge at Greater New Orleans' perimeter, and pumping any potential floodwaters out of that perimeter (see related story).
Now if faced with a storm similar in track and intensity as Hurricane Katrina, “We should fare quite nicely in terms of flood risk reduction,” Mr. Park said.
Considerable research went into designing the various components for the HSDRRS, he said. “The corps did undertake a very thorough hydraulic analysis to determine what would be the potential storm surge at every point around the perimeter,” Mr. Park said.
The research included modeling 152 storms—some actual and some theoretical—ranging from a 25-year event to a 5,000-year event.
“We've also factored in the subsidence that we've experienced in the southern Louisiana region and also the effects of climate change and sea level rise so that hard features are designed to be valid through 2057,” Mr. Park said.
Despite the robust nature of the soon-to-be-completed hurricane and storm risk-reduction system, the improvements might not be reflected in New Orleans' commercial insurance market for some time, some suggest.
Stephen Truono, vp, global risk management and insurance at Starwood Hotels & Resorts Worldwide Inc. in Stamford, Conn., said at the time of Katrina in 2005, Starwood had three hotels in New Orleans in its insurance program, none of which experienced any flooding. Still, come 2006 renewals, insurers excluded flood coverage on those properties.
Since then, insurers have included flood coverage on the properties, but at a very low sublimit, Mr. Truono said. “Because they've effectively limited their exposure by excluding it or sublimiting it, the pricing increases we've seen were not because of the flood exposure.”
Consequently, he doesn't anticipate changes in pricing or capacity due to the hurricane and storm damage risk reduction improvements in the near future.
“What you might see is the insurers being willing to open up their minds to covering more of that,” Mr. Truono said. “I think it's too soon to know.”
Michael J. Pilla, president and CEO of Technical Risk Underwriters in Austin, Texas, and a participant in the October tour, cited two reasons to think change might be slow in coming to the New Orleans market. One is that new Federal Emergency Management Agency flood maps reflecting the flood control improvements aren't expected until spring, and it's unlikely insurers will adjust pricing and capacity without those maps in hand.
The second factor is the impact of risk modeling.
“Nowadays every underwriter to some extent relies on output from modeling,” said Mr. Pilla. “Really, until those organizations reflect some of (the improvements) in their models, I don't think the underwriters can do much with it.”
“I think still a couple of dominoes will have to fall for underwriters to be able to take any official action to reflect a better-protected city,” he said. “All that said, I think they have made tremendous strides toward making it a better insurance risk.”
Paul R. Becker, president of the construction practice at Willis North America Inc. in Nashville, Tenn., and another participant on the October tour, said in talking with Willis brokers in New Orleans last week, “they really haven't seen much change based on the tour.”
“We're choosing to look at it as half full,” Mr. Becker said, the glass' full half being that insurers participated on the tour and they are underwriting business in New Orleans.
In the construction area and the market for builders risk property coverage, “generally it's available, although you need to get multiple carriers for things that are over $20 (million) to $25 million in size in the zone because (insurers) don't want to put that much capacity at risk,” Mr. Becker said. That coverage typically involves a high deductible, he said.
In the fixed-property market, “our property guys are seeing what they characterize as massive increases—30%, 40%, 50%—and that's due to the infamous RMS 11 modeling,” Mr. Becker said in referring to Risk Management Solutions Inc.'s version 11 U.S. hurricane model. “The fixed property seems to be much more driven by the cat modeling than the builders risk.”
Still, he said, “We really believe the flood protection...is amazing. It should allow (underwriters) to take some reasonable bets down there.”
John A. Tutera, senior vp-construction and completed civil works at Hiscox USA's specialty division in New York, said he thinks it's important for brokers and insureds to continue making the case about New Orleans' improved risk profile.
“I think the key thing that I've always said to a lot of clients and brokers is you really have to get out in front of the market and explain what has changed and is taking place,” Mr. Tutera said.
Mr. Perkins said his interest in arranging the HSDRRS tour had its basis in an exercise Boh Bros. went through to identify the company's core purpose and values. “And that core purpose was to honorably serve our community,” he said.
“That's what this is all about...to help New Orleans and our community and to continue to rebuild our city and get our people and businesses back,” Mr. Perkins said.
PLUS: See our exclusive photo gallery of the Greater New Orleans Hurricane and Storm Damage Risk Reduction System.
Among features of the Greater New Orleans Hurricane and Storm Damage Risk Reduction System insurance industry executives toured with representatives of the U.S. Army Corps of Engineers last fall was the Gulf Intracoastal Waterway West Closure Complex.