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NY MTA Has Less Catastrophe Insurance Than 2012

Sandy Scares Insurers Away

Wednesday, July 31, 2013 - 02:56 PM

WNYC

The New York MTA is going into hurricane season with $100 million dollars less insurance against catastrophes than it had when Sandy happened.

Last year the agency had $800 million dollars worth of coverage against so-called catastrophic perils like hurricanes. But this year, it will have to make do with $700 million.

The MTA expressed concern about its rising premiums and reduced coverage during a recent presentation to MTA board members regarding operating expenses.

“We are now are operating in an environment where we have half the coverage that we had last year, but we have two-and-a-half times the premium that we paid last year,” said Robert Foran, the MTA’s chief financial officer.

Foran made his comments when the MTA had only $500 million in coverage.  He was comparing that figure to the MTA's overall property coverage, which last year totaled $1.075 billion.

But in an interview with TN, MTA Risk Management Staff officials said the MTA “is comfortable” with the $700 million it has obtained in catastrophic coverage.

It will have to deal with that amount, because it can’t buy anymore coverage. Insurance and reinsurance companies have lost their appetite for storm risk after last year, when Sandy cost the MTA an estimated $5 billion.

“In the aftermath of Superstorm Sandy, the traditional avenues we use for insurance and reinsurance contracted dramatically, making it exceedingly difficult for the MTA to obtain insurance,” said MTA chairman and CEO Thomas F. Prendergast.

The MTA would have even less coverage, if not for its recent foray into the catastrophe bond market.

As TN reported in July, the MTA became the first U.S. transit agency to link a bond to storm surge levels.

Under the terms of the so called "catastrophe bond", investors will get a return of about 4.5% plus earnings on their collateral, so long as no Sandy-like storm surge comes along for three years.

If another Sandy does hit, investors will have to pay the MTA $200 million -- and could lose all of their principal investment.  

That said, the appetite for risk in the catastrophe bond market is relatively strong.  TN reported last week that the MTA's bond, known as MetroCat Re Ltd., issued through MTA’s in-house insurer, First Mutual Transportation Assurance Co. (FMTAC), generated so much interest it grew by 60%.

The MTA Board did authorize a bond up to $300 million, so the agency could have priced a bigger catastrophe bond deal, upping it by $100 million and meeting last year’s catastrophe insurance and reinsurance figures.  

But it’s all about supply and demand. Once you increase supply, that could have resulted in a higher pricing, and the MTA would have ended up having to pay a higher premium on the transaction, the MTA Risk Management Staff said.

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