Bracing For A New Storm Of Claims

When William M. Gray talks, property and casualty insurers listen--or at least they do now. Gray, a professor of atmospheric sciences at Colorado State University, is known for his on-target predictions of hurricane seasons. He correctly foresaw the severity and number of hurricanes in 1992, a year that resulted in a record $23 billion payout, mostly from damages caused by Hurricanes Andrew and Iniki. Gray's recent 1993 forecast of two hurricanes as intense as Andrew and a 56% increase in the number of hurricane days--days when hurricane force winds are at least 75 miles per hour for a prolonged period--sent shivers down the spines of many insurance executives.

Insurers are now scrambling to conduct a broad reassessment of the way they calculate and price risks, not only of hurricanes but of other natural disasters as well. For reasons that remain unclear--since the number of disasters is just up slightly from a decade ago--catastrophe damages have mounted sharply over the past several years (chart). The heart of the 1993 hurricane season has yet to arrive, and already natural disasters have chalked up $3.9 billion in insured damages. And experts predict more intense hurricane activity in the next decade. Insurers are moving to limit the damage in a variety of ways, from revising underwriting and raising deductibles to proposing a federal insurance program for all natural disasters, not just for flood and crop damage.

Prior to Hurricane Hugo in 1989, no hurricane had caused more than $1 billion worth of damage. And before Hurricane Andrew, which hit Aug. 24, 1992, insurers thought the worst possible windstorm would cost no more than $8 billion. But now, insurers are frantically revising their models. After inputting claims data from Andrew into their computers, Travelers Corp. found, says Senior Vice-President Dale S. Hammond, that the "model used to assess catastrophe losses was low, probably by 30% to 40%." Insurers took note of a study by Boston-based Applied Insurance Research Inc. that showed how Andrew's costs could have jumped from $15.5 billion to $52.5 billion had it hit land about 20 miles further north.

Many underwriters have turned into Weather Channel junkies--insurer United Services Automobile Assn. even has a full-time watcher of the channel on staff. Others are rubbing elbows with climatologists. Members of State Farm Fire & Casualty Co.'s claims department recently met with Colorado State University's Gray to see if there was a quicker way to determine where a hurricane might hit land. There wasn't--winds can change the direction of a hurricane. And reinsurer Lloyd's of London paid a recent visit to Bob Sheets, director of the National Hurricane Center. "The reinsurance industry is very interested in understanding what the risks are," says Sheets. "Hurricane Andrew really woke them up." One Lloyd's underwriter quoted recently in a Lloyd's internal magazine remarked: "We now work on the assumption that the future will be rougher and are turning to our own advisors, climatologists and engineers for help in assessing premiums."

COASTAL FLIGHT. Just as much attention is focused on finding out why catastrophe claims are skyrocketing. Two leading reinsurers, Swiss Reinsurance Co. and Munich American Reinsurance Co., say global warming and other climate changes may increase hurricane activity. Scientists such as Greenpeace International scientific director Jeremy Leggett think warming produces stronger hurricanes.

Global warming could have other consequences for insurers: According to the University of Maryland's Laboratory for Coastal Research, a six-meter sea-level rise from higher temperatures would submerge most of the Florida peninsula. In September, executives and insurance experts will gather at New York-based College of Insurance to discuss how global warming might affect insurers.

Insurers are also looking for more immediate solutions. One likely move: higher deductibles. The average deductible could hit $1,000 by the end of the decade and $2,500 soon afterward, up from the industry norm of $250 or $500.

Insurers would also like to cut back on writing insurance in coastal areas. In Florida, for example, many are trying to exit the homeowner's market. But the state legislature won't let them pull out until after this year's hurricane season. An industry-sponsored group, further, is pushing Congress to establish a federal insurance program to cover all natural disasters. But with lawmakers wary of what could be seen as a bailout, insurers don't expect it to pass anytime soon.

Some insurers express frustration at the turn of events. "We're not meteorologists, we're underwriters," says Travelers' Hammond. Nevertheless, now more than ever, the industry seems to be at the mercy of Mother Nature.