According to RMS, a Moody’s analytics company, because of significant exposure growth, the impact of social inflation, and climate change complications, Florida’s insurance market could struggle to respond to a repeat of a Category 5 hurricane, such as Hurricane Andrew – which hit southwest Florida in 1992.
RMS highlighted that the industry would see the insured loss for wind and surge in the range of $80 billion (GR) and $90 billion (GU), in which other non-modelled losses and social inflation could lead to a $100 billion event.
Mohsen Rahnama, chief risk modelling officer at RMS said: “Our prediction that a repeat of Andrew today could cause as much as $100 billion in insured losses is based in large part on changes in exposure and population since 1992, coupled with updated predictions of the impact of wind and storm surge, with significant anticipated post-event loss amplification.
“Together these components reveal a more complete picture of potential economic and insured losses.”
Hurricane Andrew landfall in Florida changed the face of property catastrophe insurance and kick-started many new initiatives, including the development of hurricane risk modelling.
This event caused the deaths of 44 people in the state and cost the insurance industry $15 billion (in 1992 values) for Florida claims, a number higher than the $5 billion predicted.
Despite its great impact, according to the report, the insurance industry once more seems to be in danger of underestimating its exposure to a Category 5 storm hitting Florida again.
As Rahnama highlighted, with significant exposure growth, the impact of social inflation, and climate change complications, the insurance market could struggle to respond to a repeat of Andrew.
The impact of storm surge, particularly with the climate change-related rise in sea levels, is more pronounced now compared to estimates at the time of Andrew.
Added to this is the significant demographic shift in Florida and the fact that economic exposure has grown substantially within both Andrew’s wind and surge footprints, based on an analysis of the total built floor area.
“While the wind was the main driver of loss in 1992, the number of new, high-valued buildings near the coast suggests that storm surge losses may play an increasing role in a repeat of this event,” says Rahnama.
On top of this, cost inflation since 1992 has been substantial, with replacement costs in Florida estimated to have increased between two times and 2.5 times since 1992, based on historical construction cost indices.
One key uncertainty in estimating the losses from a repeat of Hurricane Andrew concerns the impact of claims litigation, the report noted.
The 25% roof replacement rule – set in 2007, mandated that if 25% or more of a roof is ‘repaired, replaced or recovered’ in any 12-month period, then the entire roofing system or roof section must be brought up to the latest building code – contributed to a significant increase in claims frequency and severity, according to Peter Datin, senior director of modelling at RMS.
Datin also explained that the roof damage sustained during the storm attracted many roofing contractors, who handed over their exaggerated claims to be pursued by attorneys.
However, a new law passed by the Florida legislature in May 2022 changed the 25% roof replacement rule to exempt roofs “built, repaired, or replaced in compliance with the 2007 Florida Building Code, or any subsequent editions of the Florida Building Code.”
As the insurance industry would face major challenges if a hurricane like Andrew was to hit Florida again, the best thing that could be done to mitigate losses, according to the report, would be for the risk management industry, the insurance industry and regulators to work together again, similar to post-Andrew.
Robert Muir-Wood, chief research officer at RMS, commented: “Insurers need to collect detailed data on their exposures and values and then employ high-resolution modelling alongside all those factors that can affect the ultimate loss, whether from post-event loss amplification or from more resilient construction standards.”
He added: “To help insurance carriers to remain competitive, regulators and legislators have been working with the industry to prevent claims litigation from getting out of control and potentially threatening the viability of hurricane insurance in Florida,” adds Boissonnade.
“And legislators also need to keep a close eye on how claims respond to the changes to the 25 percent roof replacement rule, and in measures that reduce the need for litigation, so as to reduce vexatious claims.”
Rahnama concluded: “It’s crucial that modelling for hurricane risk takes greater account of the effects of climate change on global warming and sea level rise, and the impact those will ultimately on wind and storm surge in the event of another hurricane like Andrew. Let’s not sleepwalk into another Andrew-type scenario. The insights are there, and the warning signs have flashed – we just need to learn from history.”
