At the start of the 1992 hurricane season, catastrophe-modeling company AIR had been in business for five years, and its hurricane model was projecting that a major hurricane striking Miami could cost the insurance industry more than $30 billion.
This seemed like an outlandish figure at the time — few people believed this number or even knew what a catastrophe model was.
It was difficult to convince insurers and reinsurers that a new approach to estimating catastrophe losses was needed. The reinsurers were quite sure their tried-and-true traditional formulas were robust and they needed no other tools. After all, they had been making money for decades. Insurers simply relied on the brokers to determine how much reinsurance they needed, and that, too, seemed to be working fine.
Traditional approaches
The traditional approaches seemed adequate because no major hurricane had made landfall near a highly populated area in decades. And while the 1970s and 1980s were relatively inactive with respect to hurricanes, property values along the coast were growing exponentially. But insurance companies were not monitoring their exposures in 1992 — insurers and reinsurers were using premiums to estimate potential catastrophe losses.
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