30 Years After Hurricane Andrew, Bermuda Reinsurers, Florida ‘Joined at the Hip’
Hurricane Andrew made landfall in Florida in 1992, changing the face of the global reinsurance market just as it was beginning to emerge.
- Anthony Bellano
- August 2022
- The Situation: Hurricane Andrew, which made landfall in Florida in 1992, spurred the rise of the Bermuda reinsurance market.
- Aftermath: Bermuda reinsurers currently provide more than 60% of the hurricane reinsurance in Florida and Texas.
- Speed Bump: Bermuda reinsurers are concerned about fraud and litigation currently facing the Florida homeowners market.
Thirty years ago, the Bermuda reinsurance market was just beginning to emerge when Hurricane Andrew hit Florida on Aug. 24, 1992. The storm caused some $30 billion in insured losses in 2021 dollars, according to the Insurance Information Institute, fundamentally changing the face of the global reinsurance market.
The storm's aftermath spawned eight new reinsurance companies domiciled in Bermuda, enterprise risk management, risk-based capital requirements and the use of catastrophe models.
It also placed the Bermuda reinsurance market in the forefront of global reinsurance coverage. Bermuda reinsurers make up about 36% of the global reinsurance market based on property/casualty net premiums earned, according to AM Best. Domestically, they provide more than 60% of the hurricane reinsurance in Florida and Texas, according to the Association of Bermuda Insurers and Reinsurers.
“Bermuda has a vested interest in seeing a healthy Florida, a stable Florida where companies provide valuable coverage and survive an event to trade into new markets and new cycles,” said Bermuda Business Development Agency Chairman Stephen Weinstein. “The challenges that Florida has encountered over these last few years are not only a challenge for Florida consumers and Florida insurers, but to their partners in Bermuda.”
“Florida and Bermuda are connected virtually at the hip,” RenaissanceRe Senior Vice President and Chief Underwriting Officer for Property Justin O'Keefe said, noting that over the last few years, matters of litigation have contributed to RenaissanceRe reducing its participation in the Florida market.
One of only four Category 5 hurricanes to hit the continental United States in the last century, Hurricane Andrew caused immense destruction that led to the insolvency of several Florida insurers.
The aftermath saw the birth of eight reinsurers that came to be known as the Class of 1993: Mid Ocean Reinsurance Company Ltd., Global Capital Re, Cat Ltd., Tempest Re, LaSalle Re, RenaissanceRe, PartnerRe and IPCRe Limited. RenaissanceRe still operates independently today; the others were acquired by other insurance/reinsurance entities, according to AM Best analysts. French mutual insurance group Covéa last month said it had completed its acquisition of PartnerRe from investment group Exor NV.
Every dollar of capital for newly formed reinsurers in the immediate aftermath of Hurricane Andrew ended up in Bermuda, Weinstein said. “Every company that I was associated with chose Bermuda for what at the time was a robust regulatory environment,” Weinstein said. “To some degree its location—90 minutes outside of New York—was helpful, but so also the speed with which the capital was able to form and get into the market, which remains an advantage in Bermuda today.”
“The challenges that Florida has encountered over these last few years are not only a challenge for Florida consumers and Florida insurers, but to their partners in Bermuda.”
Bermuda Business Development Agency
Forging Other Changes
There are other ways in which Hurricane Andrew changed the market. Over the last 30 years, there has been a significant increase in the use of technology as well as the pace of change across all facets of risk management, according to AM Best Senior Director Richard Attanasio.
“In particular, the availability and affordability of property-specific details has fostered a greater understanding of risk profiles and a deeper view of what drives losses and how to mitigate them where possible,” Attanasio said. “For the most part, companies today have a significantly better understanding of their exposures and potential range of outcomes in different scenarios than they had previously.”
“Hurricane Andrew was the catalyst for the advent of what we now call enterprise risk management and risk-based capital requirements in the reinsurance industry today,” AM Best Director Steve Chirico said. “The concept of exposure management in the form of specific risk modeling, potential loss accumulation, rate on line and per-risk pricing came to the forefront as reinsurers that took heavy losses recalibrated their organizations, and new company formations learned from the lessons of the existing companies. The existing reinsurers and the 'reinsurance class of 1993' utilized data and technology to model risk, exercise underwriting discipline, and expand geographically in order to mitigate losses from the lessons learned from Hurricane Andrew.”
Aon Edge President and Chief Executive Officer John Dickson spoke about how the storm accelerated the development of the wind model, as well as the use of catastrophe models.
“The industry was slowly and reluctantly moving in that direction,” Dickson said. “Actuarial science is robust and mature and has been tested and proven to be reliable. You can have 10 years of no events and actuarial science will say you have a credible experience period, you have enough business written that the tenets of actuarial science apply, but you can have this outlier event that upends your balance sheet. You have to balance the two.”
Put to the Test
In Florida, there was a near total lack of catastrophic weather for 12 years after Andrew hit in 1992. But in 2004, four hurricanes struck the Sunshine State in a six-week span, according to the National Weather Service. Hurricanes Charley, Frances, Ivan and Jeanne hit Florida between Aug. 13 and Sept. 26. This was the first real test of the revamped reinsurance sector covering Florida risk.
O'Keefe said RenaissanceRe began to grow at that point, becoming one of the largest reinsurance companies serving Florida by 2008, with Florida risk a significant part of RenaissanceRe's catastrophe insurance portfolio.
O'Keefe said that, while the emergence of the use of technology was important, companies had to keep in mind it was only part of the answer.
“Human involvement in underwriting is still really critical in the overall insurance/reinsurance business, particularly in catastrophe underwriting,” O'Keefe said.
The industry learned several lessons, including that “the concept of cash flow underwriting and managing an insurer predicated on premium growth, if left unchecked, will manifest in huge eventual losses without an educated view of pricing and exposure management,” Chirico said.
“The concept of risk-based capital requirements replaced the old fixed-capital standards in use prior to the early 1990s. Risk-based capital has been through several iterations as it has responded to the increased complexity of operating a (re)insurer in today's world,” he said.
Bermuda reinsurers often paid the insurer when the insurer pays a claim, O'Keefe said. “RenRe has been known at times to step up and pay valid reinsurance claims in a very timely manner and in a manner that eliminates the cash flow distress for our clients,” he said. “It's the week after an event where insurance companies are out on the road with their catastrophe response teams writing checks, and cash flow is very important for them financially.”
Chirico added that Florida improved its development standards. “Florida building codes were vastly improved to decrease the impact of future hurricanes. It is widely recognized that South Florida building codes are some of the most stringent in the United States,” Chirico said.
Weinstein said that, at this point, one of the most understood hazards in the world is the Florida hurricane. “Market participants have investigated significantly to assess the potential frequency and severity of the storms, how they respond to specific types of construction in Florida, and what actually exists in Florida. The global reinsurance industry has pioneered techniques to absorb and apply data to support capital allocation, and nowhere has this been done more robustly, thoroughly or continuously than for Florida,” Weinstein said.
He said that while the industry understands hurricanes are a climate-driven risk, it is still something it struggles with. This encompasses wildfires, too.
“The science is out there, the tools are out there in the broader world to be imported into our industry, and to collaborate with partners to provide solutions that boost everyone's financial and pragmatic resiliency to these climate-driven risks,” Weinstein said. “To ignore them won't lessen the risk.”
“Whether driven by climate risk or changing demographics with people moving to more exposed areas, volatility in results continues to be an issue,” Attanasio said. “Accordingly, the management of catastrophe risk remains a critical factor in the industry—particularly for those in higher-risk areas. The second issue is the increased occurrences of so-called secondary perils—events such as wildfires, tornadoes, etc. These events have become just as impactful as larger events such as a Hurricane Andrew.”
Florida's active litigation environment is also an issue. The current trend began in 2017, O'Keefe said, with attorney's fees and the number of claims and lawsuits that followed a hurricane season that included six major hurricanes resulting in an exceptional amount of loss.
“It's our job to match desirable, well-structured risk with the most efficient capital,” O'Keefe said, adding that the influx of litigation has made it difficult for RenaissanceRe to match risk assumptions with investor capital.
“It doesn't mean that RenaissanceRe does not take Florida exposures,” O'Keefe said. “However, we've had to reposition how RenRe assumes Florida hurricane risk and change our portfolio construction around that. We have reduced our support of the admitted homeowners domestic marketplace and transferred a lot of our allocated capital to other ways to support the risk in Florida, such as commercial lines.”
He said RenaissanceRe remains committed to Florida, but the state needs to find a way to “limit the additional volatility that the fraudulent behavior and increased litigation environment adds to risk portfolios.”
“Hurricane Andrew was the catalyst for the advent of what we now call enterprise risk management and risk-based capital requirements in the reinsurance industry today.”
Combating Fraud, Other Challenges
Weinstein said the fraud associated with these losses in Florida is one of the industry's biggest problems.
To combat this fraud, Weinstein said, the industry needs two things: public policy reform and private sector innovation. He said he's pleased with some of the aspects featured in the legislation to reform the troubled homeowners market that was signed by Gov. Ron DeSantis in late May.
“I'm encouraged by some of the features in this bill, in particular the changes around the contingency fee multiplier,” Weinstein said. “I'm encouraged by some of the trends we've started to see and will see in the Florida court system over time. But we also have an opportunity in the private sector. It takes both, and I think a mix of underwriting practices, ranging from contract to claims practices and the implementation of technology to sort out the wheat from the chaff, are real opportunities for the private sector to enter into Florida, a large and important growing jurisdiction and market, and continue to play the role that the private sector can play, adding real value.”
Despite the reinsurance sector's strong Florida roots, the state's impact on the reinsurance market is limited due to diversification over the years, Chirico said.
In fact, Bermuda reinsurers write 20% of broker-placed European property catastrophe reinsurance and supply 40% of U.K. broker-placed property catastrophe reinsurance market, according to ABIR.
Globally, ABIR members and other Bermuda reinsurers covered 51% of reported liabilities for New Zealand’s aggregated 2010 and 2011 earthquakes and 50% of reported losses for the 2012 Costa Concordia cruise liner sinking and have presences in Canada, Japan, Chile and elsewhere.
“Having said that, Florida is an important market and reinsurers are exposed to the same issues as the ceding companies with which they partner including assignment of benefits, an adverse litigation environment, political tensions, commodity inflation, and anemic investment returns,” Chirico said.
“It's been three decades of challenge, but also three decades of success,” Weinstein said. “Who might have thought in the aftermath of Hurricane Andrew we'd see what we've seen, with the growth of dozens of homegrown Florida companies innovating new business models to continue providing coverage to Florida consumers, partnering with providers of capital in Bermuda and around the world to keep all their promises over these decades. We have to be clear-eyed about the challenges that the world's peak-risk market is going to face, but it's also OK to celebrate the successes that we've had together.”