It was the storm no one thought, or no one remembered, couldhappen.

Not like this.

Not this bad.

No chance.

But on Aug. 24, 1992, with winds whipping at more than 165 mph,Hurricane Andrew made landfall at Homestead, Fla. and tore throughthe Sunshine State with a terrifying ferocity.

The damage had to be seen to be understood. That's what thesister of Tom Gallagher told him.

Gallagher, then the Florida insurance commissioner (as well asthe state's treasure and fire marshal) had made some boilerplateremarks to the media following the storm about getting adjustersout to the scene and paying claims. His sister thought hisstatements were insensitive—that they lacked a grasp of what peoplehad just been through.

“She said, 'Don't you have any compassion at all?'” Gallaghersays, remembering a phone call from his sister.

“You need to see this place,” she told him.

He took her advice and got in a helicopter to go to some of thespots with the worst damage. Homestead, he says,was destroyed.

Remembering Hurricane Andrew: 20 Years Later —Slideshow

“There was nothing higher than your knees—everything wasleveled,” Gallagher says of a mobile home park he toured.“Everything was grey and black. There was no green. The palm treeshad no palms.”

Gallagher recalls a particular image burned into his memory of atwo-by-four stuck in a palm tree.

“It wasn't a splintered piece; both ends were blunt,” he says.“But there it was, sliced right through the tree. You just stare atit and think, 'How can that even happen?'”

A storm like Andrew made it happen—a storm that immediatelyturned the stomachs of insurance executives.

Gallagher's up-close-and-personal inspection of the damagehammered home just how devastating the damage was, and he requiredmany insurance company executives take helicopter rides with him inthe days following Andrew in order to visit insureds—and understandjust how grim the situation was.

“I wanted them to see the faces of the people they insured—thefolks who had paid them money in case something like thishappened—the folks who were just trying to get back on their feet,”Gallagher says.

It worked to a point. By February 1993 a report by Gallagherindicated insurers had already paid out more than $11 billion topolicyholders despite there being no real standard to handle theunprecedented situation Andrew offered.

But at the same time, insurers were telling Gallagher they wereleaving, or significantly cutting back policy counts—especially onthe coast.

Mass Exodus, and the Fallen

A month after Andrew left, a special session of the statelegislature was called to basically shake out the cobwebs andfigure out a plan.

By that time, Allstate already told Gallagher they had plans tonot renew more than 800,000 policies, he says. Other carriers werecoming up with similar plans to non-renew, cancel, and reduce thenumber of new policies written.

“Companies hadn't been tracking exposures on a detailed basis,”says Karen Clark, the mother of catastrophe modeling and thefounder of what is now catastrophe modeler AIR Worldwide.

Making matters worse, no one was lining up to take the policiesbeing left behind by the fleeing national carriers, who wrote 94percent of the homeowners' business. (Today, national carriers makeup less than 20 percent of the market.)

“Right away we had a true [availability and affordability]emergency on our hands,” says Gallagher, who is now with the lawfirm Colodny, Fass, Talenfeld, Karlinsky & Abate as aconsultant in its governmental consulting and insurance-regulatorypractice.

Proof the storm caught many carriers by complete surprise,Andrew caused the insolvencies of eight insurance companies and the“technical insolvencies” of others—subsidiaries that requiredfunds from a parent company to pay claims, according to a report by Lynne McChristian, Floridarepresentative of the Insurance Information Institute.

“I remember speaking to one company executive, and he said hethought his agents were doing a bang-up job,” relays Gary Kerney,assistant vice president of Verisk's Property Claim Services. “The[premiums] were pouring in. Then all of a sudden they were payingout more money than they had made the previous 20 years.”

Birth and Evolution of Models

Andrew catapulted Clark's catastrophe model product, whichissued a staggering insured-loss estimate of $13 billion for Andrewsoon after the storm. The industry had predicted a far lessexpensive worst-case scenario for Florida based off lossessustained from 1989's Hurricane Hugo in South Carolina, whichcaused about $4 billion in insured losses.

“The industry tended to look at what just happened versus whatcould happen,” Clark says.

Before the hurricane, the data reinsurers had asked from clientswas limited to state premiums by line of business, adds Clark, nowthe CEO of Karen Clark & Co. But immediately following Andrew,reinsurers wanted more exposure data; and insurers—who had beenfocused more on market share rather than underwriting—realizedquickly that they were significantly concentrated on the coast.

“It wasn't a consideration before,” says Kerney of coastalexposure management. “Even when Karen's estimate came out, itwasn't taken seriously. [Insurers] thought it was impossible.”

Andrew “revealed that Florida's vulnerability to hurricanes hadbeen seriously underestimated,” says McChristian.

Therefore, there was a massive reassessment of coastal risk.Using the services of a new catastrophe-modeling industry, insurerslooked to get a more accurate read on exposure concentrations andwere to turn to the reinsurance industry for a better spread ofrisk.

“Carriers started tracking exposure, getting a betterunderstanding of the values,” Clark says.

Gone are the days when insurers would pin locations of exposureson a map and use an arbitrary percentage of total insured value tocome up with a probable maximum loss, remembers AIR Worldwide,which adds that insurers have “made great strides toward improvingthe quality and resolution of their exposure data.”

Catastrophe models “took off” after Andrew, says Rich Attanasio,vice president of P&C ratings at A.M. Best Co., as companieswere “forced to understand their exposure.”

“Insurers developed a whole new risk-management framework, andwe look for companies to take ownership of that—to truly understandexposure and not be solely reliant on catastrophe models,” headds.

Reluctant Solutions

Models became an instant beneficial tool for insurers, but thatdidn't help Florida's immediate property insurance crisis.

Gallagher issued numerous emergency rules related to the quickreduction in insurers' appetite to write in Florida. He had to atleast slow it down.

For example, insurers had to submit plans to take any action inthe marketplace 90 days before doing so—a rule that evolved in May1993 to a 90-day moratorium on the cancellation and nonrenewal ofpolicies. More regulations followed. Moratoriums were extended.Limits were placed on how much of an insurer's book it couldnonrenew.

“They didn't necessarily like the rules imposed but they weren'tgoing to challenge it under the circumstances,” Gallagher says

He also allowed the Florida Property and Casualty JointUnderwriting Assoc., previously earmarked for last-resortcommercial coverage, to provide residential coverage to homeownerswith an insolvent insurer. Soon thereafter, legislators created theResidential PCJUA—the precursor to Citizens Property InsuranceCorp.

At Gallagher's urging, state legislators authorizedmunicipalities and counties to issue $500 million in tax-free bondsto fund a shortfall at the state guaranty fund.

During a second special session prior to 1993's hurricaneseason, the Florida Hurricane Catastrophe Fund was establishedbecause the last-resort insurer had already expanded drastically,and its financial stability was questionable.

“There was a shortage of reinsurance,” Gallagher says. “It wasimpossible to get, let alone afford.”

The former insurance commissioner says he didn't really want tocreate a fund that would ultimately assess everyone in Florida ifit needed to, and he would have preferred not to issue bonds thatneeded to be paid back by residents, but he says, “We weredesperate.”

“There was no industry and no entrepreneurs looking to invest inus,” he recalls. “I challenged everyone for better ideas. Icertainly wasn't married to the ones we wound up going with. But wehad to.”