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Sandy’s Business-Interruption to Fuel Insurance Costs

Hurricane Sandy’s cost to insurers will be fueled by higher-than-estimated claims from clients who purchased protection to guard against business interruption, Fitch Ratings said.

The storm left more than 8 million customers without power, shutting airports and New York’s subway system, and disrupting business at retail, manufacturing and energy firms. Business-interruption coverage reimburses companies that suspend operations after property damage, while contingent BI policies offer protection if a supplier’s operations are hobbled.

Insurers may incur $5 billion to $10 billion in costs from the storm, according to catastrophe modeler Eqecat Inc. The total includes losses on auto, home and commercial coverage and follows record losses for the industry last year on disasters in Asia and the U.S.

“Extensive BI and CBI losses were experienced by the insurance industry last year in both the Japanese earthquake and tsunami and Thailand floods, as they accounted for a considerable portion of commercial and industrial losses,” the ratings firm said today in a report. “These events demonstrated the extent to which BI and CBI losses have been underestimated in the modeling and underwriting of risks.”

American International Group Inc. has said the company’s costs from Sandy will be more similar to Irene than the Japan disaster, which cost insurers as much as $40 billion, according to Munich Re. Irene caused about $4.3 billion in privately insured losses, according to the Insurance Information Institute, an industry group.

Irene Comparison

“It will be Irene, plus or minus something,” AIG Chief Executive Officer Robert Benmosche said at a conference yesterday in Chicago. “We don’t see it as anywhere near the tsunami.”

AIG, the insurer that counts the U.S. as its largest shareholder, had $574 million in catastrophe costs at its Chartis property-casualty unit in last year’s third quarter, led by Irene, the New York-based company said last year. The insurer said the earthquake and tsunami in Japan fueled about $1.7 billion in catastrophe costs in the first quarter of 2011.

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