When Hurricane Andrew tore through southern Florida in 1992, tearing down buildings and killing more than two dozen people, few had seen such a devastating natural disaster in the United States.
In the 30 years since then, the United States has endured several storms that caused more damage than Andrew, but it was the previous storm that made insurance companies and corporations aware of the potential for such huge losses and changed property guarantees and risk management.
Disaster modeling, which was in its infancy before Andrew, became a mainstream warranty tool; outdated and poorly enforced building codes were upgraded in Florida and elsewhere, making homes and businesses more resilient; eight highly capitalized real estate disaster reinsurance companies were launched in Bermuda, causing repercussions throughout the insurance sector; and insurance contracts were reviewed, which in practice imposed much higher retentions on policyholders.
In addition, disaster management strategies were revised and rewritten as companies and insurance companies spent more time planning how to cope with future storms.
Hurricane Andrew landed as a Category 5 storm near Homestead, Florida, on August 24, 1992. It had previously hit the Bahamas and continued to cause further damage in Louisiana.
A relatively compact storm, most of its damage in Florida was limited to the area south of Miami. Estimates vary, but according to data collected by the National Hurricane Center, 26 people were killed as a direct result of Andrew; the storm caused $ 25 billion in total damage; 25,524 homes were destroyed and 101,241 were damaged. In Homestead and neighboring Florida City, 99%, or 1,167 of 1,176, campers were destroyed.
Yet the storm ranks as only the eighth largest insured loss since 1900, causing $ 16 billion in insured losses at the time of the event (see chart) and is not ranked among the 10 most costly in terms of financial losses.
While Hurricane Hugo in 1989, which resulted in more than $ 4 billion in insured losses, had drawn the attention of insurers to the level of devastation a hurricane could cause in the United States, “Andrew caught everyone a little out of control of how extensive and complete the devastation was. ashore, says Todd Billeter, Stamford, Connecticut-based senior executive at Aon PLC, who was the property reinsurer in 1992.
“It had been decades and decades since such a devastating hurricane hit Florida,” said Gary Marchitello, president of Willis Towers Watson PLC’s North American real estate business in New York. “Entrepreneurs immediately realized that they were setting too many limits and priced the risk incorrectly.”
Scott Clark, Area Vice President, National Risk Control, at Arthur J. Gallagher & Co. in Naples, Florida, lost his home during the storm. At the time of Andrew, he was head of risk and benefits at Miami-Dade County Public Schools, a position he retired from in 2016.
The district suffered a $ 98 million loss as a result of the storm. Most of the loss was insured due to a common deductible provision for its windstorm coverage, which essentially assumed that the lowest deductible for windstorm on any of its insurances would be applicable to all damages. While the district had a $ 1 million deductible on its surplus property policy, its boiler and machine coverage – placed with another insurer – had a deductible of $ 100,000, which according to the common deductible provision was also applied to property losses.
“It was negotiated and was pretty standard on the day,” said Mr. Clark, who is also a former president of the Risk & Insurance Management Society Inc.
Many large insurance companies had a limited understanding of their exposures before Andrew, said Rep Plasencia, vice president and Boca Raton, Florida, office manager for Risk Placement Services, a unit in Gallagher.
“The carriers could not track exposure, as they are now,” he said. “Some of them at that time basically traced their cat loads with map pins on a map.”
Actuaries based their assessments on historical storms, indexed for exposure growth and increased values, Plasencia said.
The losses from the storm had an immediate effect on the insurance market and how storm risks were taken out.
Insurance companies sharply reduced property boundaries, Florida risks had to be syndicated in global markets to get adequate coverage and prices rose dramatically, Marchitello said.
The year before Andrew, Miami-Dade, which was and is the fourth largest school district in the country based on student enrollment, paid a premium of $ 770,000 for $ 150 million in property insurance, which was placed with two domestic insurance companies, Mr. Clark said.
After the storm, the district had to buy coverage from 26 different insurance companies, mainly in London, and the premium jumped almost ten times to $ 7.5 million. The windstorm deduction increased tenfold to $ 10 million.
“At that time, in 1992, the $ 7.5 million premium was the same as the cost of building an elementary school,” Clark said.
Many insurance companies replaced deductibles in dollars with percentage deductibles, which increased the deductibles of policyholders by multiples, said Mr. Marchitello.
“You took a house of $ 500,000, which may have had $ 1,000 or $ 2,500 deductible on it, all of a sudden if you went to a 5% (windstorm deduction) you went to $ 25,000,” said Mr. Plasencia.
The percentage of deductibles has varied through market cycles over the past 30 years and in the current market, some insurance companies are trying to introduce 10% deductibles for windstorms for commercial line risks, he said.
A major change from a reinsurance guarantee point of view after Hurricane Andrew was a focus on data, says Billeter from Aon. Before the storm, reinsurers would look at spreadsheets and assess insured values within a state, with some information about the location of the properties, he said.
“We looked at government data, and if you got data at the county level, it would be crazy granular then,” Billeter said.
After Andrew, recently developed disaster models were widely used by reinsurers and later by primary insurers (see related history).
The storm opened the eyes of reinsurance executives to the extent of possible losses and led to a comprehensive inclusion of disaster models in reinsurance guarantees, said Jayant Khadilkar, who worked on disaster model Applied Insurance Research, which became AIR Worldwide, in 1992, before continuing to work at RenaissanceRe Holdings Ltd. , TigerRisk Partners and Ariel Re, where he is a board member and advisor.
Before Andrew, reinsurers based their issue guarantees more on market shares and compared a cedance premium with the total industry premium, says Khadilkar, who is based in Raleigh, North Carolina.
“In the past, it was based on historical losses, but with the models, guarantors could see what could potentially happen,” he said.
The importance of disaster models for property reinsurance “can not be underestimated,” said Matt Junge, Schaumburg, Illinois-based real estate guarantor, regional and national in the United States, at Swiss Re Ltd. “They run our pricing for contracts, they run Primary Risk Pricing as well.”
Requirements and restrictions
Andrew also changed the way professionals’ claims approached disaster claims, said Robert O’Brien, a Washington-based executive director of the National Property Damage Group at Marsh LLC.
“Andrew was what changed almost everything about disaster response,” he said. “It changed the way building rules are reviewed and applied, how we mobilize people to get into these areas, and it changed the way we track storms.”
After Andrew, it became clear that the local building regulations were inadequate and inadequately applied. In the years following the storm, a commission reviewed state building codes and made a variety of recommendations, leading to the establishment of the Florida Building Code, which replaces local building codes.
Among the requirements in the code is that buildings must be built with windows that are impact-resistant or protected if a building is within a mile of the coast, and roofs must be secured with hurricane strips and straps.
Another big lesson from Andrew was to make sure insurers and property owners had access to restoration services, O’Brien said. The width of the damage made it difficult to secure and repair properties after the storm.
Risk management practices also changed. Before Andrew, property risk control was focused on fire risks, Marchitello said.
“It became very clear that you could protect yourself against windstorm events, and it focused on the quality of the design, the quality of data for insurers to evaluate risks,” he said.
In addition, for example, organizations focused on securing secondary power sources for power-dependent businesses, such as grocery stores and gas stations, said Plasencia of RPS.
Risk managers also learned lessons in setting up systems to contact employees to ensure they were safe and how to transfer operations to other areas, Plasencia said.
In addition, risk managers and insurers began looking more closely at surrounding structures to determine if they were susceptible to damage from projectiles blown from less secure buildings, he said.
“A good property guarantor always takes the satellite images and they look at the surrounding areas and the structures around the structure,” said Plasencia.
The storm also placed a much greater emphasis on data quality and understanding to reduce losses, says Junge from Swiss Re.
“That understanding of how these changes to reduce physical losses should actually flow through in economic terms in insurance modeling, I think it can be traced back to Andrew,” he said.