There wasn't much risk modeling being done in the insurance industry prior to Hurricane Andrew. But after that devastating storm struck Florida in 1992, insurers realized the old way of doing business had to go and new tools were needed for the industry to manage catastrophe exposure. Today, as the models mature, insurance carriers and reinsurers are becoming increasingly reliant on the models, particularly for use in hurricane and earthquake coverages. The software assists underwriters with difficult decisions 20th century underwriters had to make relying on market knowledge and gut instinct.

Vanguard Fire and Casualty writes only Florida homeowners, a volatile market where reinsurers play a major role in protecting policyholders and insurers. “Insurers and reinsurers have a lot on the line,” says Martin Bobek, chief underwriting officer for Vanguard. “We are very close to [the reinsurers] and, to some extent, at their mercy in terms of having to underwrite business that makes [the reinsurers] comfortable doing business with us.” The reinsurers depend heavily on risk models, and to varying degrees, Bobek believes, some are dependent on the software completely.

The models represent the best estimate the industry has for storms, according to Werner Kruck, vice president of personal lines underwriting for the Southeast division of North Pointe Insurance. “If not the models, then what?” he asks. “The models capture all the knowledge we have. It may not be enough, but it's all we have.”