It has been 25 years since Hurricane Andrew swept through South Florida leaving $26.5 billion (1992 USD) of economic damage in its deadly wake. Of that astonishing figure, only $15.5 billion was insured, dumping the remaining $11 billion economic loss on American society.
But what impact would Hurricane Andrew have if it struck today?
A new report from global reinsurer Swiss Re reveals that a similar event today would totally dwarf the losses experienced a quarter of a century ago. The company modelled the outcome of the exact same storm in 2017 and found that economic losses would be estimated at $80-100 billion in current US dollars, of which only $50-60 billion would be covered by insurance.
Celebrate excellence in insurance. Nominate a worthy colleague for the Insurance Business Awards!
Swiss Re also studied a scenario in which Andrew’s track shifted 20 miles north today, to directly strike Miami. Losses in this case would range from $100-300 billion, making it the costliest natural disaster ever in the US. Again, just over 50% of the damage would be covered by insurance, leaving a huge shortfall to be made up by taxpayers and the government.
“The results serve as a wake-up call to the insurance industry, homeowners, small businesses, public officials and the private sector,” said Marla Schwartz, atmospheric perils specialist, Swiss Re. “A common response is ‘sticker shock,’ as some of the numbers are hard to fathom and rather unsettling. Although it is certainly difficult to wrap your mind around an economic loss in the range of USD 300 billion, it is critical in order to truly address present-day hurricane risk.”
The levels of underinsurance are some of the most shocking statistics in the Swiss Re report. For lower-income residents or smaller enterprises in Florida, underinsurance can be blamed on the cost of coverage (premiums and deductibles), according to Schwartz.
“In emerging and developing markets, there seems to be a rather low level of risk awareness and risk culture,” she added. “Some people in these markets have never had insurance before or are not familiar with insurance products, so it is difficult to penetrate these markets with traditional products. This highlights the need to develop innovative products that address the unique needs of underinsured communities or those with historically poor risk awareness.
“Additionally, 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, it is critical to point out that this quiet period does not translate to decreased risk: it’s not a matter of if a major hurricane will barrel through South Florida, but when.”
Preparing Florida for Andrew’s second strike requires team work, communication and education, according to Schwartz. Brokers need to share this “profound protection gap” with clients so that they fully understand their risk and have as much mitigation and protection in place as possible.
“Overall, our findings have the same take-away message for primary insurers, consumers and brokers,” Schwartz commented. “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.”