Hurricane Andrew: 20 Years Later

Aug. 23 marked 20 years since Hurricane Andrew wreaked havoc on Florida on its way to becoming the third-costliest hurricane in history. We spoke with Gary Kerney, assistant vice president, property claim services, at Verisk Analytics to see how the storm fundamentally changed how the insurance industry prepares for and responds to natural catastrophes.

In today’s dollars, how much damage and cost did Andrew produce? How does it compare to other disasters, such as Katrina?

In today’s dollars, based solely on inflation, Hurricane Andrew’s loss would be $25.3 billion.  This compares to an inflation-adjusted figure for Hurricane Katrina of $48 billion. However, it’s difficult to put into perspective the amount of loss Hurricane Andrew would cause today.

As a point of comparison, in 1985, Hurricane Elena (with insured losses of less than $600 million) struck in much of the same area as Katrina. Elena was also a Category 3 hurricane at landfall, but Mississippi in 1985 was a much different place than it was when Katrina struck in 2005. More than 25 years ago, much of Gulfport was unoccupied, and Biloxi was a very small town.

In the years between 1985 and 2005, there was tremendous growth in Mississippi due in large measure to gambling. As a result, thousands of homes, apartments, condominiums, and retail outlets were developed in that region. The difference in the infrastructure and the building inventory was comparable to the difference between the two hurricanes.

The implications for growth in building inventory and infrastructure are the same for South Florida today. I was in Miami about four years ago, and one night I counted 32 roof cranes just from my hotel room window. To me, that view signaled that a significant building effort was under way, and the same is occurring in areas south of the city. If another Andrew strikes South Florida as Andrew did in 1992, or even strikes a little farther north, the insured property losses could be staggering. 

What was the biggest lesson insurers learned from Hurricane Andrew?

One important lesson concerned adjuster safety. In the aftermath of Andrew, amid all the destruction in South Florida, adjusters went into affected areas such as Homestead with no water, no food, no directions, no landmarks, no means of communication with their office or team, and no way to communicate with policyholders. Some adjusters even wore sneakers when surveying these destructed areas.

Today, adjusters meet beforehand to learn about the risks. They have cell phones, GPS, water, lunches, and work boots. Adjusters are encouraged not to enter unsafe areas or unsafe structures.

Another lesson was derived from the basic insurance principle of spread of risk. One insurance company executive told me then that the agents in South Florida did a spectacular job in generating revenue through the sale of new policies to homeowners. Unfortunately, when Andrew struck, those homeowners suffered significant losses. The company paid more in claims than it generated in revenue in nearly 20 years. 

If Andrew happened today, how would the response by insurers differ from that of 20 years ago?

In addition to the change to adjuster safety, insurers today are more cognizant of their reinsurance needs. Reinsurance has been a big issue, in Florida in particular, for some time. As a result, and along with the need for greater monetary protection, insurance-linked securities (ILS) have grown. The ILS transactions can take several forms, and catastrophe bonds have become commonplace for adding protection against hurricanes, along with other perils.

Hurricane risk, though, is still a very large concern for insurers and reinsurers. Insurers are pursuing a greater spread of risk and reduction in policies by insurers, especially in Florida. Along with this development, we have seen growth in terms of policies in force of Citizens Property Insurance Corporation (a government corporation that provides insurance protection in Florida) and growth of the “take out” company market (insurance companies assuming risk from Citizens). To add to its protection, Citizens has sponsored just this year the second-largest catastrophe bond ever with Everglades Re.

In addition to reinsurance and ILS transactions, there are more contingent equity capital transactions taking place. These transactions are designed to provide increased capital to the issuer, particularly following a major natural disaster, so the insurer can continue to write new business and avoid harm from a costly disaster. 

Have building codes changed since Andrew? What has been the effect of these changes, if made?

Building codes are imperative, and the results of strong building codes are well documented. The Institute for Business and Home Safety and similar organizations have shown how stronger building codes protect the built environment. One concern with building codes is that only a small percentage of the current building inventory is subject each year to the installation of better building features. The implementation of the stronger codes will protect property. Some may argue that insurance is purchased to replace damaged or destroyed property; therefore stronger codes are not necessary. I would argue that stronger codes protect property, which means that individual homeowners and business owners are not displaced or forced to relocate because of the extent of damage.

Building codes protect both property and a way of life. Here’s an interesting issue that has remained outside the discussion of building codes and better construction practices: In the aftermath of Andrew, local building departments were unable to effectively deal with the number of permits requested during the rebuilding process. One consequence was that some homeowners, relying on friends and relatives, made their own repairs. The question today is: How will these properties fare in the next big hurricane? That question has not been answered for 20 years. Let’s hope it will not be a significant factor.

What effect has modeling had on insurance from both a policyholder and insurer perspective?

Catastrophe modeling has come a long way since 1992. Andrew was the first test for the modelers. At the time, there were few people who had any faith in the model outputs about the losses caused by Andrew.

Twenty years later, the models now can give a detailed summary of the exposures faced by insurers and reinsurers. Not only are building and contents value important, but also business interruption is an important element in any loss scenario.

In Florida, modeling has become so significant that the state created the Florida Commission on Hurricane Loss Projection Methodology to evaluate the computer models and other methodologies for projecting hurricane losses. I believe the models have given insurers, reinsurers, and policyholders a better idea of the risk and exposure to hurricanes in Florida and other regions of the country.

Hurricanes can cause a great deal of damage, and insurers and reinsurers need to pay claims. If they cannot, no one wins. Insurance funds the largest proportion of recovery after most disasters, and if insurers and their reinsurers are not able to pay for the losses they have insured, there will not be a sufficient recovery.