Aug. 24, 1992 was anything but a typical Monday for Robert Reynolds as he drove through debris-filled roads and devastation on the way to his family-run agency then located just north of Homestead, Fla.
Hurricane Andrew had just barreled through the region, killing 26 people, knocking out power to hundreds of thousands, and destroying more than 25,000 homes and damaging at least 100,000 others.
Reynolds arrived at his office, the Morris & Reynolds Insurance Agency, at about 2:00 pm that day after the Category 5 storm had passed and was not prepared for what he saw.
“It was an absolute mess,” he said. “It was hard to comprehend and process… just like that, the world had changed.”
The agency, founded in 1910 by Reynolds’ grandfather, had taken a direct hit from the powerful storm. Dead fish were plastered all over the inside walls; the roof, doors and windows were gone, and all of the agency’s client files, still in the big green file cabinets, were wet.
“It’s one thing to have to serve clients within our industry in the important role we play as agents, especially after a natural disaster, but to also deal with the direct impact of that same disaster… it made for very interesting times,” Morris said.
Just as the insurance industry does in the aftermath of a catastrophe, Reynolds and his agency employees got to work. They began fielding office visits from their clients, as well as some who weren’t their clients, and working with carriers to pay out claims. Travelers Insurance set up a claims office on the Morris & Reynolds Agency property and loaned the agency a generator so it could power its business until electricity was restored, which wasn’t until exactly 30 days after the storm hit.
Reynolds and his employees came to the office, or what was left of it, every day including weekends to help clients get their claims paid and get back on their feet.
Twenty-five years later, Reynolds is still proud of how the industry and his agency came together during that time.
“The promise we keep in this business is if someone has a claim, we are going to help them and get it paid,” Reynolds said.
Andrew’s Impact on the Industry
Not all citizens and businesses got back on their feet after Hurricane Andrew. The category 5 storm was the costliest disaster in U.S. history when it struck Florida and then Louisiana with overall damage at the time of $15.5 billion, according to the Insurance Information Institute (I.I.I.).
And when all was said and done, the industry was not prepared to pay that amount in claims. Andrew was responsible for the failure of at least 16 insurers between 1992 and 1993, I.I.I. reports.
Before Andrew, insurers writing in Florida were not looking closely at their exposure in hurricane-prone regions. It was the first cat 5 hurricane in Florida since the Labor Day Hurricane of 1935, a hiatus that gave everyone who lived there and insurance companies a false sense of security.
“I can’t tell you how many companies told me they were driving street by street to count how many homes they insured because they didn’t know – it was a free-for-all,” said Reynolds.
Andrew was a wake-up call on how vulnerable the industry was to a major catastrophe and how inadequately insurers were pricing their risks. Andrew forced insurers to take a more responsible approach to how they managed their books of business and capital.
“The industry learned that at any given point in time, they have to make sure they are properly capitalized and reinsured, and to make sure that risk is spread very broadly in the insurance and reinsurance market rather than concentrated on a few players,” said Roger L. Desjadon, CEO of Florida Peninsula and Edison Insurance Co., and chairman of the Florida Property Casualty Association.
After Hurricane Andrew, the state formed the Florida Hurricane Catastrophe Fund (FHCF) to protect and maintain insurance industry capacity. It was founded in 1993 during a special legislative session and still provides reimbursements to insurers for a portion of their hurricane losses.
In addition to private reinsurance that Florida insurers buy, the FHCF fund currently has $17.6 billion available, and according to the state this is the second year there is more money available than it would need to pay out if storms racked the state.
Andrew helped fuel the development of the catastrophe modeling industry. Technologically, it was a very different world in 1992 when Hurricane Andrew came through, not just for people who weren’t using cell phones or the internet in their everyday lives, but for the insurance industry and how it assessed risk.
Cat models were in the very early stages and not widely used by the industry before Andrew. Karen Clark, CEO of Karen Clark & Co., developed the first cat model in the 1980s.
“We had clients using models before Andrew but they didn’t believe the numbers because they were higher than what they thought [storms would cost],” she said.
Since then, insurance companies have accepted and widely implemented cat models, according to Jackie Noto, flood risk expert and meteorologist for catastrophe modeling company RMS.
“Hurricane Andrew put hurricane models on the map, and with data from Hurricane Andrew, we were able to release other models with more info and data,” Noto said. “As a scientific community, we react to the lessons learned from events.”
In addition to modeling risk, cat models are now used by insurance companies to assess their reinsurance needs, evaluate their capacity, and understand if the premium they are charging matches the cost associated with the risk on their overall books, Noto said.
“Events like Andrew have proven the value of catastrophe modeling to show what the impact on a portfolio could be,” she said.
Andrew also taught insurance companies about the importance of individual characteristics of their risks, like roof age, the quality of a home and its materials, and over time, insurance companies have expanded requirements in underwriting to make sure they look at those features.
“Before cat models were used, insurers didn’t have the ability to look at those attributes or know what your unknowns were or what the impacts of those unknowns could be,” Noto said.
Andrew forced Florida to take a better look at its building codes and improve the quality of construction built in the state.
According to I.I.I., before Andrew, standards for construction and code enforcement varied widely from one county to the next. The storm demonstrated the important role strong building codes play in public safety and led to the Building Code Effectiveness Grading Schedule (BCEGS), mandated by state statute, with a focus on preventing losses from natural disasters.
There is now a uniform set of codes across the state that stipulate all new structures undergo tougher inspections and be built with shatterproof glass and straps to reinforce between roof and walls. Many of the new building code measures were pushed for by the insurance industry in an effort to reduce loss.
I.I.I. says its was the high cost of Andrew, combined with a recognition of the growing exposure of construction on vulnerable coastal areas, that created the hurricane deductible concept. It works by having customers pay a percentage deductible for storm-related damages rather than a flat amount.
Now, hurricane deductibles are used in at least 19 states and help to maintain the availability and affordability of insurance, I.I.I. said.
New Hurricane Products
Companies have looked at ways other than traditional insurance policies to help clients recover after a hurricane event.
Topa Insurance Co., based in California, launched a product earlier this year with ARC called StormPeace that offers reimbursement expenses of $1,000 up to $15,000 for clients that suffer hurricane damage.
In the event of a large storm, the company reaches out to policyholders in the area via text or email asking if they have been affected and have storm-related expenses, whether it be to fix home damage or evacuation costs. If the policyholder says yes, money is sent to the customer’s bank account.
John Donahue, president and CEO of Topa, said the product helps customers at a time of crisis.
“This product is designed to say to the consumer that in the worst-case scenario, you are going to have cash quickly. You don’t have to wait for claims adjusters or estimates,” he said.
After Andrew when insurers realized they had more risk than they could handle, Donahue said, they had to raise deductibles, which moved the cost burden more to customers and less to the insurance company. The downside for the consumer, he said, is many people may not have enough damage to their home to meet their deductible and can get stuck paying out of pocket for repairs. StormPeace helps policyholders in that scenario.
“With this policy, as long as you know the storm was within a certain distance of your home, you are going to be compensated,” he said.
Andrew also taught the industry about the importance of educating customers on hurricane mitigation and preparedness, and most companies now spend more time and resources on these efforts.
Florida insurers send hurricane information to their policyholders each season and many offer discounts for mitigation work done on customer homes.
Technology and social media have provided a more direct way for insurance companies to reach out to their customers to help them prepare for a storm.
“The opportunity to talk and communicate with costumers in advance of what they need to do is much better than it used be,” Desjadon said.
While those efforts have helped customers understand their risk and reduce company exposure, experts say they still worry about what they call “hurricane amnesia” because of the number of years since a significant storm event in Florida.
For the insurance industry, that is a timeless hurdle.
“Florida has never gone this long without a large hurricane landfall,” said Megan Linkin, natural hazards expert for Swiss Re. “There is a complacency that has occurred – people have short memories. And people who have moved to the area since are not well-versed in the potential impact a storm like Andrew can have.”