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24 Aug 17 13:22

Today, we mark the 25th anniversary of Hurricane Andrew's landfall in South Florida. As we remember the devastation and lives lost, we also appreciate the rebuilding efforts and resilient spirit that have allowed South Florida to flourish again.

Since June, our Open Minds blog series have offered a reflection on Andrew's profound impact on the reinsurance/insurance industry. You've read about Andrew's effect on claims, our careers and our lives. You also learned about how Andrew led to the birth of the cat bond market. This blog series has offered a deep sense of Andrew's impact on catastrophe risk management.

With all the talk about Andrew's impact on South Florida and re/insurance, it’s only natural to wonder: What if Andrew hit South Florida in 2017? Is South Florida a sitting duck for the next Big One? 

Fortunately, the insurance industry has tools to answer these questions, and, as you read about, Hurricane Andrew led to the rapid evolution of these sophisticated tools. Megan Linkin and I utilized Swiss Re's risk assessment tools to evaluate what would happen if Hurricane Andrew were to strike again. 

Andrew caused 26.5bn (1992 USD) in economic damage, but a losses from a present-day storm with an identical track and at the same intensity would dwarf the losses experienced in 1992. Our analysis shows that physical damage from a present-day Andrew would exceed USD 80bn-100bn, and only USD 50bn-60bn is likely to be insured.

Damages increase due to a combination of population growth and coastal development. Yet, the physical damage is kept just under USD 100bn because of efforts to address South Florida's vulnerability. (Miami-Dade, together with neighboring Monroe and Broward Counties, maintains the nation’s highest wind standards when it comes to building codes.)

As hurricane geeks and reinsurance professionals, an even scarier hypothetical comes to mind: What if Andrew made landfall about 20 miles north of its historical landfall location in Fender Point, FL? This would place Andrew’s eye directly over Miami, an area far more populated, developed and commercialized compared to Homestead, yet arguably no less vulnerable or prone to hurricanes.

Cat models allow us to estimate the financial impact of hurricanes that have not necessarily occurred in the historical record, but are physically possible. A hurricane of
comparable intensity and size to Andrew that makes landfall in the city of Miami is estimated to produce losses to the insurance industry of a magnitude not yet observed: USD 60bn-180bn. The estimated economic damage from these storms ranges from USD 100bn-300bn, making it the costliest natural disaster ever in the US.

While these numbers invoke a sense of "sticker shock," the difference between economic and insured losses calls attention to a profound protection gap and the remarkable weight carried by society when natural catastrophes like Andrew occur. We must close the protection gap together to reduce the impact of these inevitable shocks.

Numbers like these serve as a wake-up call: It is more important than ever to better understand hurricane risk, to learn about new solutions that address the protection gap, and to consider if insurance instruments are sufficient to cover financial needs in the event of a significant loss, like an Andrew.

You can download a copy of the full publication here. The report dives into the topics above, and offers insight on changes in South Florida since Andrew, the impact of global sea level rise on storm surge, and Miami's recent efforts to mitigate their ever-increasing flood and hurricane risk.

The US has not experienced a major (category 3 or greater) hurricane landfall since Wilma in 2005. This extended quiet period can lead to complacency, and insurance take up rates begin to drop as memories of hurricanes fade. However, this quiet period does not translate to decreased risk.

We hope the 25th anniversary of Andrew's landfall serves as a wake-up call to the insurance industry, homeowners, small businesses, public officials and the private sector to better manage hurricane risk and remember it's not a matter of if a major hurricane will barrel through South Florida, but when.

Category: Climate/natural disasters: Disaster risk, Floods/storms, Resilience


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