While Hurricane Andrew led to permanent changes across the commercial property insurance industry, the sector of the market that was most immediately and significantly transformed was reinsurance.
In the 18 months after the 1992 storm, eight highly capitalized property catastrophe reinsurers were established in Bermuda offering much needed capacity in a market where prices were rising sharply.
Later in the 1990s, many of the cat reinsurers were absorbed by other companies, notably by Bermuda’s large liability insurers Ace Ltd. and Exel Ltd., but their formation set a higher bar in terms of capitalization of reinsurers, established Bermuda as a global reinsurance market, and their use of catastrophe models helped set a trend for the industry.
Prior to Andrew, Bermuda had largely been a domicile for captive insurers, until Ace, which later bought and merged into Chubb Corp., and Exel, which eventually became Axa XL, a unit of Axa SA, were formed during the U.S. liability crisis in the mid-1980s.
The success of Ace and Exel gave Bermuda credibility as a market for capital, said Michael Butt, former chairman of Axis Capital Holdings Ltd. and a longtime London market and Bermuda industry executive, who was president and CEO of Mid Ocean Reinsurance Co. Ltd., the first of the Bermuda property cat reinsurers to form in 1992.
The property cat reinsurers brought in business from around the world and expanded their own operations.
The companies “changed Bermuda from being U.S.-centric to being global,” Mr. Butt said.
They also attracted significant amounts of capital, compared with many smaller reinsurers in the market.
“We started with $300 million, and we ended up after the end of the first year with $700 million. And the entry price is now $1.5 billion,” Mr. Butt said. “The depths of the capital markets in the U.S. and the quality of the capital made all the difference.”
The storm also changed reinsurance underwriting, which previously was based on the experience of an underwriter, he said.
“And you did it largely instinctively. The intellectual or technical support was limited,” Mr. Butt said.
Increased use of information technology and the availability of catastrophe models led to improvements in the quality of information available to underwriters.
“And the fact that the new capital was demanding and saying, ‘If you’re going to be doing this, boys, you better get it right, so could you make sure you’ve got the right tools to do it?’” Mr. Butt said.
Using catastrophe models enabled reinsurers to differentiate between insurers with similar property premium levels, said Jayant Khadilkar, who worked at catastrophe modeler Applied Insurance Research, which became AIR Worldwide, in 1992, before going on to work at RenaissanceRe Holdings Ltd., a cat reinsurer set up in 1993, and later Ariel Re, where he is a board member and adviser.
“Of course, there is qualitative stuff that goes into underwriting, and there’s no substitute for that, but there has to be an underlying foundation of analytics that drives the pricing, the risk selection and the whole portfolio composition,” he said.
The models also created the basis for the development of the insurance-linked securities market, said Mr. Khadilkar, who is based in Raleigh, North Carolina.
“Andrew led to the acceptance and promotion of catastrophe modeling, which allowed a mechanism to attract investors into the ILS market,” said Gary Marchitello, chairman of Willis Towers Watson PLC’s North American property practice in New York. “That took five to seven years to germinate, but the starting point was Andrew.”
With the changes in computing power since Andrew, increases in available data and the use of models, the reinsurance market is better positioned to withstand large catastrophes, said Todd Billeter, Stamford, Connecticut-based senior managing director at Aon PLC.
“We would hope that a hurricane like this isn’t going to surprise us,” he said.
Changes in prices and property development in Florida would also change the cost of a storm similar to Andrew.
“We would estimate that if Andrew struck again, that $16 billion that was insured in 1992 would become $60 billion today,” said Matt Junge, Schaumburg, Illinois-based head of property underwriting, U.S. regional and national, at Swiss Re Ltd.
But in terms of managing exposures, the industry is better situated to manage the loss than it was in 1992, he said.