Charley Causes a Path of Destruction in Florida, Carolinas

Lessons from Andrew Taught Industry to “Be Prepared”

Lessons learned from the most costly natural disaster in U.S. history more than prepared the insurance industry for the destruction left by Hurricane Charley.

Despite being touted as the second costliest hurricane in U.S. history, the industry stayed true to the old Scout motto to “be prepared,” and was ready to address the devastation left by Charley the moment the storm hit shore.

Charley, which swept across Florida and into the Carolinas, will still rank as the second most costly in U.S. history surpassed only by Andrew which caused $15.5 billion in insured losses, Robert Hartwig, the Insurance Information Institutes’ chief economist, said. According to the I.I.I., insurers will pay an estimated $7.4 billion in losses for homes, businesses and personal possessions damaged by Hurricane Charley.

“That $7.4 billion includes losses in the Carolinas and up the coast,” Joseph Annotti, spokesperson for the Property Casualty Insurers of America, said. “Florida losses alone are probably in the $6 billion range,” he said.

Despite the massive damage to property, the priceless loss of human lives, which now totals 25, and the emotional stress of losing everything one owns, the industry says the primary difference between the aftermath of Andrew and Charley lies primarily in 12 years of preparation. According to the industry, Charley will be nowhere near as damaging as Andrew.

“Overall we think that the industry as a whole is going to be able to sustain this,” Bob Lotane, spokesperson for the Florida Office of Insurance Regulation, said. “A lot of lessons were learned with Andrew.” Lotane said that there were three primary lessons learned and solutions instituted in the wake of Andrew that will help the industry to recover—and recover quickly.

One lesson learned was the need for a state administered reinsurance program to stabilize the property insurance marketplace after many insurers fled the state or became insolvent due to massive losses generated by Hurricane Andrew. And so, the Florida Hurricane Catastrophe Fund (Cat Fund) was created to provide a stable and ongoing source of reimbursement to insurers for a portion of their catastrophic hurricane losses in order to provide additional insurance capacity for the state. The Cat Fund was expanded this year through legislation from a total capacity of $11 billion to a total capacity of $15 billion.

“From the estimates we’ve seen so far, this hurricane will trigger Cat Fund payments,” Annotti said.

Lotane added that the retention level for the Cat Fund is $4.8 billion. “That much would have to be paid out before companies could start using the Catastrophe Fund,” he said. “The Cat Fund will certainly be paying out some.”

Annotti added that, “The Cat Fund appears to be more than adequately capitalized to make those payments without having to sell bonds and probably without having to increase assessments.” According to Annotti, each carrier has a threshold that depends on its market share. “After that, the Cat Fund pays 90 percent of the losses above that.”

Hurricane Charley will be the third catastrophe to utilize Cat Fund dollars. In 1995, Hurricanes Eric and Opal both paid out through the Cat Fund.

The second lesson learned was the need for an insurer of last resort in the property market—basically a state organized insurance company that insures the toughest risks. That insurer, known as Citizens Property Insurance Corporation, is now the second largest homeowners’ insurance writer in Florida with 10.5 percent of the market share. Only State Farm writes more with 21 percent of the market. Allstate follows closely behind writing 10.2 percent.

Citizens currently estimates that it will pay out $1.2 billion in losses from Charley, and stated in a release that “These losses are significantly less than the one-in-100 year storm season that Citizen’s maintains in claims paying resources.”

“Generally, Citizens insures windstorm risks in the wind pool areas, those are the very exposed beach areas,” Lotane said.

He added that Citizens will often times write just the wind exposure for a property, which includes hurricanes and wind events, and another insurer will pick up the other exposures such as personal property, fire and liability.

The third thing, and according to Lotane, the primary reason why the industry overall will be able to absorb the losses of Charley, has to do with rate adequacy.

“We found out that our rates were woefully inadequate,” Lotane said. “Because of Andrew rates were raised over the years and we feel we have achieved rate adequacy.”

According to Lotane, the Florida Office of Insurance Regulation now looks for carriers to file rates where their loss ratios are at around 40 percent. “So you take 40 percent and add on expenses, whatever, it could be … it looks as if they’re running away with the keys to the bank. However, we require them to reserve all that extra premium.”

Nowadays, the department looks for reserves that equal about a tenth of a hurricane per year, he said. “We would look at their total exposure and we would want them to reserve enough to be able to handle a tenth of a hurricane, or major catastrophic event.” Lotane said that amount is somewhere in between a Hurricane Charley and a Hurricane Andrew. “Since it has been a while since our carriers have had a catastrophic event, they have substantial reserves and are able to handle these losses.”

Other losses not included in the $7.4 billion estimate might consist of lost wages and revenues, tax receipts, additional government outlays for disaster relief and damage to property that was uninsured.

In addition, the estimate does not include flood damage, which can be covered through the National Flood Insurance Program, or crop insurance, which is largely covered through the Federal Crop Insurance Program.

Agricultural losses for areas impacted by Charley are expected to be significant, although no actual loss assessments had been released at press time.

Topics Florida Catastrophe USA Carriers Profit Loss Legislation Hurricane Property