Californian ‘bomb cyclone’ insured losses estimated to be US$0.5-1.5bn

Posted 30/01/2023 – Quick takes

Moody’s RMS, the global catastrophe modelling company, has estimated that the economic losses from the recent floods in California will be in the region of US$5-7bn, including infrastructure damage (particularly to roads).

RMS’s estimate for the total insured losses is US$0.5-1.5bn, including losses borne by the National Flood Insurance Program (NFIP) as well as the private flood market.

A series of extratropical ‘bomb cyclones’ began on 26th December 2022. Bomb cyclones describe areas of rapidly falling pressure that are created when regions of warm and cold air collide.

These cyclones produced very heavy precipitation across the state of California which in turn caused: rivers to burst their banks; flash flooding to impact rural, commercial and residential areas; and heavy snowfall across the Californian Sierra. The rainfall was particularly high due to a band of high atmospheric water vapor drawing moisture from the tropics to higher latitudes, also known as an ‘atmospheric river’, with several locations in California receiving their annual average rainfall in less than one month.

The presence of flood defences helped mitigate some of the worst effects of the storms, but thousands of homes and businesses were without power and at least 6 people were killed.

The drought conditions that had preceded the cyclones (2022 was the second driest year for some areas of California in over 128 years) exacerbated the impact of the rainfall. Ironically, though, it is unlikely that the rain will have completely alleviated California’s drought conditions because it fell too quickly to recharge groundwater systems. RMS stated that “extreme drought leads to soil compaction which means less infiltration and more runoff, hence less aquifer recharge and a higher risk of flooding”.

RMS estimate that only c2% of Californian households have flood insurance, a number that has been falling in recent years, reducing the impact on the insurance sector. RMS state that as of August 2022, there were only 193,281 residential NFIP policies in place, a c5% decline since 2021.

Alpha comment

Despite the record breaking rain and snow fall experienced in California, the insurance losses are small and therefore this series of weather events are unlikely to be material for the syndicates supported by Alpha.

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