On Aug. 24, 1992, with winds whipping at more than 165 miles perhour, Hurricane Andrew made landfall at Homestead, Fla. and torethrough the Sunshine State. Some say the damage had to be seen tobe understood. At least that's what the sister of Tom Gallaghertold 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 adviceand got in a helicopter to go to some of the spots with the worstdamage. Homestead, he says, was destroyed.

“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's up-close-and-personal inspection hammered home justhow devastating the damage was, and he required many insurancecompany executives take helicopter rides with him in the daysfollowing Andrew in order to visit insureds.

“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.

Mass Exodus
A monthafter Andrew left, a special session of the state legislature wascalled to basically shake out the cobwebs and figure out a plan. Bythat time, Allstate already told Gallagher they had plans to notrenew 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 required fundsfrom a parent company to pay claims, according to a report by LynneMcChristian, Florida representative of the Insurance InformationInstitute.

“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 20years.” 

Birth and Evolution ofModels 
Andrew catapulted Karen Clark &Co.'s catastrophe model product, which issued a staggeringinsured-loss estimate of $13 billion for Andrew soon after thestorm. The industry had predicted a far less expensive worst-casescenario for Florida based off losses sustained from 1989'sHurricane Hugo in South Carolina, which caused about $4 billion ininsured losses.

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

Before the hurricane, the data reinsurers hadasked from clients was limited to state premiums by line ofbusiness. Immediately following Andrew, however, reinsurers wantedmore exposure data; and insurers—who had been focused more onmarket share rather than underwriting—realized quickly that theywere 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 wheninsurers would pin locations of exposures on a map and use anarbitrary percentage of total insured value to come up with aprobable maximum loss, remembers AIR Worldwide, which adds thatinsurers have “made great strides toward improving the quality andresolution 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.

ReluctantSolutions 
Models became an instantbeneficial tool for insurers, but that didn't help Florida'simmediate property insurance crisis. Gallagher issued numerousemergency rules related to the quick reduction in insurers'appetite to write in Florida. He had to at least slow it down.Forexample, insurers had to submit plans to take any action in themarketplace 90 days before doing so—a rule that evolved in May 1993to 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 could notrenew. 

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

He also allowed the Florida Property and Casualty JointUnderwriting Assoc., previously earmarked for last-resortcommercial coverage, to provide residential coverage to homeownerswith a non-insolvent insurer. Soon thereafter, legislators createdthe Residential 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 secondspecial session prior to 1993's hurricane season, the FloridaHurricane Catastrophe Fund was established because the last-resortinsurer had already expanded drastically, and its financialstability 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.”

“No industry entrepreneurs [were] looking to invest in us,” herecalls. “I challenged everyone for better ideas. I certainlywasn't married to the ones we wound up going with. But we hadto.”