The deadly storm transformed the market | Business Insurance

When Hurricane Andrew tore through southern Florida in 1992, destroying 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, the US has endured numerous storms that caused more damage than Andrew, but it was the previous storm that put insurers and businesses on notice of the potential for such large losses and transformed property underwriting and management. danger.

Catastrophe modeling, which was in its infancy before Andrew, became a common signature tool; outdated and poorly enforced building codes were improved in Florida and elsewhere, making homes and businesses more resilient; eight highly capitalized property catastrophe reinsurers launched in Bermuda, causing reverberations throughout the insurance sector; and insurance contracts were revised, effectively imposing much higher retentions on policyholders.

Additionally, disaster response strategies were rethought and rewritten as businesses and insurers spent more time planning how to deal with future storms.

Hurricane Andrew made landfall as a Category 5 storm near Homestead, Florida, on August 24, 1992. Earlier, it had struck the Bahamas and continued to cause further damage in Louisiana.

A relatively compact storm, most of its damage in Florida was confined 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 total damage of $25 billion; 25,524 houses were destroyed and 101,241 were damaged. In Homestead and neighboring Florida City, 99%, or 1,167 of 1,176, mobile homes were destroyed.

However, the storm ranks as the eighth largest insured loss since 1900, causing $16 billion in insured losses at the time of the event (see chart), and does not rank among the top 10 in terms of economic losses.

Covered Losses

While Hurricane Hugo in 1989, which resulted in more than $4 billion in insured losses, had alerted insurers to the level of devastation a hurricane could wreak in the United States, Andrew “caught everyone a little off guard as to how “Great and complete destruction was where it hit the ground,” said Todd Billeter, Stamford, Connecticut-based senior managing director at Aon PLC, which was a property reinsurer in 1992.

“It had been decades and decades since such a devastating storm had hit Florida,” said Gary Marchitello, chairman of Willis Towers Watson PLC’s North American property practice in New York. “Underwriters immediately realized they were setting too many limits and misjudging the risk.”

Scott Clark, senior area vice president, national risk control, at Arthur J. Gallagher & Co. in Naples, Florida, lost his home during the storm. During Andrew’s time, he was the risk and benefits officer for Miami-Dade County Public Schools, a position he retired from in 2016.

The district suffered a loss of $98 million as a result of the storm. Most of the loss was insured due to a common deductible provision for windstorm coverage, which essentially provided that the lowest windstorm deductible on any of its policies would be applicable. for any damage. While the district carried a $1 million windstorm deductible on its excess property policy, its boiler and machinery coverage — placed with another insurer — had a $100,000 deductible, which under the common provision deductible also applied to property losses.

“It was negotiated and it was pretty standard on the day,” said Mr. Clark, who is also a past president of the Risk & Insurance Management Society Inc.

Many large insurers had a limited understanding of their exposures before Andrew, said Rep. Plasencia, executive vice president and Boca Raton, Florida, office chief for Risk Placement Services, a unit of Gallagher.

“Carriers weren’t able to track exposure like they are now,” he said. “Some of them back then were basically tracing their cat loads with poles on a map.”

Actuaries based their estimates on historical storms, indexed for increased exposure and increased values, Mr. Plasencia said.

Market changes

Losses from the storm had an immediate effect on the insurance market and the way windstorm risks were underwritten.

Insurers pulled back property limits significantly, Florida risks had to be spread across global markets to get enough coverage, and prices rose dramatically, Mr. Marchitello said.

In the year before Andrew, Miami-Dade, which was and is the nation’s fourth-largest school district based on student enrollment, paid a premium of $770,000 for $150 million in property insurance coverage that was placed with two local insurers, Mr. Clark said.

After the storm, the district had to buy coverage from 26 different insurers, mostly in London, and the premium increased nearly tenfold to $7.5 million. The windstorm deduction increased tenfold to $10 million.

“At the time, in 1992, the $7.5 million price tag was equivalent to the same cost to build an elementary school,” Mr. Clark said.

Many insurers replaced dollar discounts with percentage discounts, which increased policyholders’ retention many times over, Mr. Marchitello said.

“You got a $500,000 house that might have a $1,000 or $2,500 deductible, all of a sudden if you go to 5% (windstorm deductible), you go to $25,000,” Mr. Plasencia said.

Percentage discounts have changed in market cycles over the past 30 years, and in the current market some insurers are looking to put 10% windstorm discounts on commercial lines risks, he said.

A big change from a reinsurance underwriting perspective after Hurricane Andrew was the focus on data, said Mr. Aon ticket. Before the storm, reinsurers would look at tables and estimate insured values ​​within a state, with little information on the location of properties, he said.

“We were looking at state data, and if you had county-level data, then it would be clearly crazy,” said Mr. Ticket.

After Andrew, catastrophe models, which had recently been developed, were widely used by reinsurers and later by major insurers (see related story).

The storm opened the eyes of reinsurance executives to the scale of potential losses and led to the widespread adoption of catastrophe models in reinsurance, said Jayant Khadilkar, who worked at catastrophe modeler Applied Insurance Research, which became AIR Worldwide. in 1992 before. continues to work at RenaissanceRe Holdings Ltd., TigerRisk Partners and Ariel Re, where he is a board member and advisor.

Before Andrew, reinsurers based their underwriting more on market share, comparing a cedant’s premium to the overall industry premium, Mr. Khadilkar, which is based in Raleigh, North Carolina.

“In the past it was based on historical losses, but with the models the underwriters were able to see what could potentially happen,” he said.

The importance of catastrophe models for property reinsurance “cannot be understated,” said Matt Junge, Schaumburg, Illinois-based head of U.S. regional and national property underwriting at Swiss Re Ltd. and the price of primary risk.”

Claims and mitigation

Andrew also changed the way claims professionals approach catastrophe claims, said Robert O’Brien, a Washington-based managing director in the national property claims group at Marsh LLC.

“Andrew was the one who changed almost everything about disaster response,” he said. “It changed the way building codes are reviewed and enforced, how we mobilize people to get into these areas, and it changed the way we track storms.”

After Andrew it became clear that local building codes were inadequate and not being adequately enforced. In the years following the storm, a commission reviewed the state’s building codes and made a series of recommendations, which led to the creation of the Florida Building Code, which supersedes local building codes.

Among the code’s requirements is that buildings must be constructed with windows that are impact-resistant or screened if a building is within a mile of the coast, and roofs must be secured with ties and hurricane straps.

Another big lesson of the Andrew claims was making sure insurers and property owners had access to restoration services, Mr O’Brien said. The extent 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, Mr Marchitello said.

“It became very clear that you can protect against windstorm events and it brought into focus the quality of construction, the quality of data for underwriters to assess the risks,” he said.

In addition, for example, organizations focused on providing secondary sources of energy for energy-dependent businesses, such as grocery stores and gas stations, said Mr. Placencia of RPS.

Risk managers also learned lessons in setting up systems to contact workers to make sure they were safe and how to transfer operations to other areas, Mr. Plasencia said.

In addition, risk managers and insurers began looking more closely at surrounding structures to determine whether they were susceptible to damage from shells thrown from less-insured buildings, he said.

“A good property underwriter always pulls out the satellite imagery and they’re looking at the surrounding areas and the structures around the structure,” said Mr. Plasencia.

The storm also put a greater emphasis on data quality and understanding loss mitigation efforts, Mr. Junge of Swiss Re.

“That understanding of how these changes in physical loss mitigation should translate into financial terms in insurance modeling, I think that can all be traced back to Andrew,” he said.

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