4 Lessons From Hurricane Andrew

It’s been 25 years since Hurricane Andrew struck the coast of Florida on August 24, 1992.
The state was no match for the 17-foot storm surge and high winds the category 5 storm produced. Andrew became the costliest disaster in U.S. history when it struck Florida and Louisiana, according to the Insurance Information Institute (I.I.I.), causing $15.5 billion in damage at the time (nearly $24.5 billion in 2016 dollars). Hurricane Andrew ranks third in insurance claims payouts, behind Hurricane Katrina in 2005 and the September 11, 2001 terrorist attacks.

Though Andrew caused $26.5 billion in economic damage, only $15.5 billion of that was insured.

Swiss Re reports a modern-day Hurricane Andrew would cost somewhere between $80-$100 billion, with only $50-60 billion covered by insurance.

If Andrew’s track shifted by just 20 miles north through Miami, estimated losses would likely range between $100-$300 billion, the reinsurer noted. Only $60-$180 billion would be covered by the private insurance market.

According to Sean Kevelighan, I.I.I. CEO, there are a number of lesson to be learned from Hurricane Andrew.

“Prior to that August day in 1992, few had come to grips with the necessity of being both financially and structurally resilient,” said Sean Kevelighan, CEO, I.I.I. “Financial resiliency means getting the right type and amount of insurance. And, being structurally resilient means building above the current building code standards with structures tough enough to withstand major storms.”

Key lessons resulted from Andrew, the I.I.I. said, changing the way the insurance market works in all coastal states. These lessons affect how insurers approach the marketplace and manage coastal risk:

Lesson 1: Importance of strong building codes

The storm highlighted the need for better and more consistent building codes.

According to the I.I.I., “Decades of cutting corners in construction and lax building code enforcement led to great devastation in Homestead, Florida. Before Andrew, standards for construction and code enforcement varied widely from one county to the next.”

As a result of the storm and damage incurred, the Building Code Effectiveness Grading Schedule (BCEGS) was created and mandated by state statute.

“The challenge we face is risk denial. The further away in time and space people get from a storm, the more difficult it is to convince them to prepare,” said Julie Rochman, president and CEO of Insurance Institute for Business & Home Safety (IBHS). “Mitigation means taking steps to defend yourself, your property and your finances from the wind and water that accompany powerful storms. How well you prepare before a storm is critical to how well you recover.”

Lesson 2: Keeping insurance available and affordable through hurricane deductibles

According to the I.I.I., the high cost of the storm, combined with a recognition of the growing exposure brought on by continued construction in vulnerable coastal areas, launched the concept of percentage deductibles for storm-related damage.

Currently, 19 states and the District of Columbia have hurricane deductibles. They help insurers purchase reinsurance at a lower cost, which keeps premiums in check.

Florida law requires insurers to inform policyholders of the exact dollar amount of their hurricane deductible, typically a percentage of the insured value of their home.

Lesson 3: Spreading Florida’s risk globally and the growth of domestic insurers

Insurers that had a substantial book of business in Florida reexamined their exposures after Andrew. Some insurers chose to non-renew or cancel while others requested significant rate increases.

After Andrew, many insurers chose to utilize reinsurers to reduce their risk, according to the I.I.I.

In addition, Florida has a mandatory public catastrophe mechanism, the Florida Hurricane Catastrophe Fund (FHCF). All insurers operating in the state must buy reinsurance, the I.I.I. noted.

Lesson 4: Managing and minimizing government roles in insurance

After many private insurers exited the Florida marketplace, Citizens Property Insurance exposure grew following Hurricane Andrew. According to the I.I.I., depopulation in recent years has allowed the state run insurer to reduce its exposure. Citizens has also taken steps to minimize deficits through the purchase of reinsurance and catastrophe bonds to reduce the risk of deficits following another major hurricane.

“There hasn’t been a major hurricane in Florida in a dozen years,” said McChristian. “As a result, many people have ‘hurricane amnesia’ or have never experienced the devastation; they just aren’t prepared. Remembering the lessons from Hurricane Andrew is essential to being able to bounce back from the next major storm.”

(Source: I.I.I./Swiss Re)