NYC MTA Storm Surge Protection via Catastrophe Bond Market (New York City Metropolitan Transportation Authority)

After Hurricane Sandy, the Metropolitan Transportation Authority (MTA) sold a catastrophe bond in July 2013 to raise funds to manage flood risk to the system and offset any costs of future storm damage if the city is hit by another hurricane in the next three years. Sandy caused an estimated $4 to $5 billion in damages to MTA assets; as a result, insurance prices for MTA doubled. To finance protections from future storm surges, MTA issued $200 million in shares of catastrophe bonds to supplement traditional insurance, costing MTA $46 million a year. The catastrophe bond sale is the first-of-its kind approach that will allow MTA to diversify its insurance options for the system.

By MTA’s estimate, Hurricane Sandy caused damages requiring $4 million for subway car repairs and replacement, $222.5 million for station repairs, and $215 million for track repairs. In particular, the South Ferry-Whitehall Street subway station sustained extensive damage due to the platform being entirely submerged and water levels reaching near the top of the escalators in the lobby area. MTA’s insurance policy at the time was worth $1 billion, but was set to expire on May 1, 2013. After Sandy, MTA would no longer able to receive that amount of coverage for the same price; just $500 million in coverage would cost more than twice the amount of the original $1 billion policy.

MTA employed Risk Management Solutions, Inc. (RMS) to calculate the risk involved with obtaining storm surge protection through the catastrophic bond market. The bond is the first solely storm surge-based catastrophe bond in the market.  MTA opted to have the catastrophic bond triggered only by storm surges of a certain level from named storms (excluding extra-tropical cyclones such as Nor’Easters). The storm surge levels were based on the risk models and the fact that storm surge-related damage has the highest probability of causing losses for MTA. The models indicated that there is a 40 percent chance that damage in the northeast from hurricane-related storm surges will be greater than damage caused by winds. According to RMS, the likelihood of a Sandy-level storm surge occurring every year is only 1.67 percent, and according to NOAA’s HURISK program, which models return paths for storms along coasts, a major hurricane is only expected in New York City once every 175 years. The models indicate that the only time that storm surges reached triggering levels in the past several decades was during Sandy with 10.93 foot surge and Hurricane Donna in 1960 with a 9.52 foot surge.   

In addition to the low likelihood of a triggering event occurring, the transparency of the triggering event for the bond made the bond an appealing option to investors. The triggers are based on data received from existing tidal gauges and are run by USGS and NOAA. To trigger the bond, the storm surge would have to reach 8.5 feet in certain areas (The Battery, Sandy Hook, and Rockaway Inlet) and 15.5 feet in other areas (East Creek and Kings Point). The triggers are not subject to MTA’s control, and unlike traditional insurance, there is no possibility of a grey area in determining whether the bond is triggered.

In the unlikely event that a major hurricane does occur and trigger the bond prior to August 5, 2016, the 20 investors will lose the $200 million they invested in purchasing the catastrophe bonds and the money will be used to pay for any necessary repairs to the subway system. If no catastrophic storm or flooding occurs before the end of the bond period, MTA will return the $200 million from a trust, and the investors will receive a 13.5 percent return, an additional $27 million in profit, from MTA.

 

This Adaptation Clearinghouse entry was prepared with support  from the Federal Highway Administration. This entry was last updated on January 29, 2015.

 

Publication Date: July 31, 2013

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