Three decades ago today a tropical depression formed which would eventually become Hurricane Andrew, a storm which would make a Category 5 landfall in Florida. Robert Muir-Wood examines how the Sunshine State responded and the ongoing challenges facing its insurance market today…

Hurricane Andrew

With some 30 years passed since Hurricane Andrew made landfall as a Category 5 storm on 24 August 1992, near the city of Homestead, Miami-Dade County, what can we say has changed over this period? What has got better, and what has got worse?

We start with what has got better. First is science and technology. As those in the insurance industry at the time will testify, pre-Andrew was still in the “analog” era. In 1992, risk analysis relied on actuarial expertise, the historical experience of events and judgement. Early hurricane catastrophe modelling was emerging. This meant that software was still being loaded using a pile of one-megabyte floppy disks.

In 1992 insurers relied on the experience of the last Category 5 storm in the market – this would include the 1935 Labor Day storm, which skirted Florida’s Gulf Coast. Without a historical reference from a comparable Category 5 event that had hit Miami-Dade, or even an accurate record of the exposure being covered, the estimation of potential losses from an event such as Andrew was largely a guessing game.

Robert Muir-Wood

With $15.5bn in claims ($50bn in 2021 prices), losses went far beyond predictions and as the limitations of these prevailing approaches came to light, eight insurers became insolvent following Andrew, according to the Insurance Information Institute. Others were technically insolvent, and state legislators had to intervene to shore up the insurance industry to prevent non-renewal.

Confidence to move forward was required and catastrophe modellers started to utilise science that could quantify unprecedented physical events that were within the realm of reasonable possibility. And broad zip code-level risk assessment wasn’t enough; modellers such as RMS started to account for building-specific characteristics and their vulnerability to hurricanes, together with recognition of the growing population density and increasing construction and property values along the coastlines. This confidence spread to reinsurers and the rapid growth of eight new reinsurers in Bermuda that placed the use of catastrophe models squarely in their business plans.

Now, 30 years after Hurricane Andrew, the marketplace has experienced a transformation – both in how insurers understand hurricane risk via cat modelling, but also as a result of well-intentioned regulations that created conditions where both insureds and insurance providers became caught in a $15bn legal quagmire. Let’s see how we got here.

The risk laboratory

The second area of improvement was state regulation (but this is also on the negative side later). Florida has turned into a living “risk laboratory”, where legislation and new innovations are developed, trialled and implemented, with many other states adopting what they regard as best practices from Florida.

There has been a huge focus on mitigation and understanding how mitigation measures help to reduce loss, which is recognised in risk modelling. Building codes in South Florida have been strengthened to mandate new builds to be resistant to wind speeds up to 180 miles per hour, and a minimum of 120 miles per hour across the state. To accommodate the new codes, a wealth of new products from shutters and windows to reinforced roofs are on the market and approved for use with buildings inspected by trained officials.

”Florida has turned into a living “risk laboratory”, where legislation and new innovations are developed, trialled and implemented, with many other states adopting what they regard as best practices from Florida”

The state also created the Florida Hurricane Catastrophe Fund (FHCF) in 1993 to fill the immediate reinsurance gap when the market seized up after Andrew. The structure of the FHCF is based on modelling results, including RMS models, and in 1995, the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) was formed. The FCHLPM is an independent body developing standards and reviewing hurricane loss models used in the development of residential property insurance rates and the calculation of probable maximum loss levels.

And as the private market struggled to deliver for homeowners, Citizens was founded in 2002, as the union of the Florida Windstorm Underwriting Association and the Florida Residential Property Casualty Joint Underwriting Association, to step in and provide back-up insurance. If you look at 2012, some 20 years after Andrew, the Florida insurance market had rebalanced and new entrants were established – including within Florida.

In many ways, Florida became a model state in terms of its determination to deliver for its citizens in terms of a healthy insurance market with increased hurricane resilience.

Now here’s what has got worse. First is the escalation of the risk, which is driven by factors such as climate change, the rising population and exposure at risk and a legislative environment that is making it difficult for insurers to focus on delivering insurance when it matters most – during a catastrophic event.

Growing exposure

By all measures, Florida is growing strongly. Florida’s population in 1992 was 13.69 million, in 2022 it is 22.13 million – a 61 percent increase, making it the third most populous state. The population of Miami-Dade has increased from 2 million in 1992 to 2.74 million today; Broward County from 1.3 million to 1.84 million.

Using the RMS ExposureSource Database, 1.91 million buildings are currently within Andrew’s wind footprint and 55,456 within its storm surge footprint. Since 1992, building counts have increased by 40 percent and 32 percent in the wind and surge footprints respectively. Economic exposure has also increased by 77 percent in the wind footprint and 67 percent within the surge footprint. The number of buildings over 15 storeys in Miami-Dade has tripled since 1992, many of which are in Andrew’s surge footprint.

In terms of new home construction, in 2021 some 209,000 new housing units were authorised representing around 11 percent of all permits issued nationwide, in a state with 9.67 million units in 2019. Florida median home values to April 2022 had increased by nearly 22 percent year on year.

And it’s beachfront property that’s in demand – 4.2 million homes were bought in Florida coastal counties between 2000 and 2020, with 258,000 units bought less than a quarter of a mile from the coast. These homes were on average just nine and a half feet above sea level. Sea level rise for Miami Beach could reach over 13 inches between 2020 and 2050. Miami is around six feet above sea level.

”Another Andrew-style event will be more severe in terms of impacts – be it wind, flood and/or storm surge. There is more exposure in low-lying vulnerable areas, and the exposure is of higher value”

In addition to sea level rise, “nuisance” or “Sunny Day” flooding is becoming a daily occurrence, tidal flooding has increased 352 percent since 2000. King tides are a foot higher than normal tides, and during a hurricane, a severe storm surge will become a 10-year event, rather than a 100-year event. As seen with Hurricane Harvey in Texas, flood can be a key loss driver, as climate change can exacerbate both precipitation and wind speed.

Another Andrew-style event will be more severe in terms of impacts – be it wind, flood and/or storm surge. There is more exposure in low-lying vulnerable areas, and the exposure is of higher value. According to the track of the storm relative to the exposure concentrations in southeast Florida, the physical loss alone could be double that of the original Hurricane Andrew.

But what of the cost of those additional factors that have developed since 1992, what gets termed social inflation? Seventy-six percent of all lawsuits nationwide against insurers are in Florida, a state that represents just 8 percent of policyholders. In 2021, some 100,000 property insurance-related cases were filed in Florida courts.

Insurance supports attorneys

Some $15bn has been paid by insurers due to homeowners litigation since 2013 in Florida, with assignment of benefits cases representing a third of new cases and litigation capitalising on the “25 percent” roof rule, where the insurer can have to pay for a roof to be replaced if just 25 percent was damaged. The worst part is that homeowners have received less than a tenth of the $15bn – 91 percent is absorbed by attorney fees on both sides.

Getting a new roof thanks to your insurer is placing a huge strain on the insurance market even without a significant hurricane event. And there is no such thing as a free lunch, or roof, as premiums rise dramatically, insurers pull out of the state or go insolvent (five so far in 2022 representing over 340,000 policies and $650mn of direct premiums written), leaving Citizens to take up the slack – going from 570,000 policies in 2021 to a predicted one million at the end of 2022.

There is new legislation that came into law in July that attempts to rein in further some of the excesses and create an environment where insurers pay genuine damage claims rather than become engaged in a wild dance of escalating payouts with a deceitful assignment of benefits contractors and hungry lawyers. Yet the lawyers are not going to give up their insurance income without a fight and we have yet to see how this will play out.

”It would only take two major hurricane hits close together in time, as happened in 1926 and 1928, to knock out reinsurance capacity and private insurance”

Southeast Florida reflects the largest concentration of hurricane risk worldwide. As such it requires concerted actions to sustain insurability, in particular through the implementation of stringent building codes for wind as well as appropriate investments in flood protection.

Reinsurers are already being more selective in where they are placing capacity due to the increases in risk exposure, challenging carriers to find affordable coverage. It would only take two major hurricane hits close together in time, as happened in 1926 and 1928, to knock out reinsurance capacity and private insurance. And that would have a devastating impact on the mortgage industry and the Florida economy in general. Few Floridians may realise what a tightrope has to be walked to sustain hurricane insurance in their state.

To finish on a positive note, thanks to advances in catastrophe risk modelling, the insurance industry can analyse and quantify hurricane risk at a resolution that is incomparable to 30 years ago. Understanding wind, flood, storm surge, climate change projections, accurate exposure databases and individual building vulnerability, insurers can dive into their portfolio risk.

Robert Muir-Wood is chief research officer at RMS and has more than 20 years’ experience in developing probabilistic catastrophe models. RMS is also helping clients to quantify social inflation factors, contact us at sales@rms.com for a copy of our social inflation white paper.

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