Hurricanes have always been a fact of life in Florida. For as long as people have lived in the region there has been a recognition of the risk posed by hurricanes. There was, however, a lull in massive Category 5 hurricanes between the 1935 Labor Day hurricane – still the strongest recorded hurricane to make landfall in the United States – and Hurricane Andrew in 1992. Floridians and insurance companies developed a false sense of security about the risks posed by these storms, and the cost of rebuilding after an especially vicious one.

That’s not to say hurricanes did no damage in those periods, but from 1900 to 1949 hurricanes only caused about $4.5 billion of damage (adjusted for inflation). From 1950 to 1974 tropical storms and hurricanes caused about $7 billion of damages (adjusted for inflation). From 1975 to 1999 the total property damage from hurricanes ballooned up to $51.1 billion (adjusted for inflation). More than half of that damage was caused by one storm – Hurricane Andrew.

The Cost of Hurricane Andrew

The estimated $26.5 billion ($48 billion adjusted for inflation) cost of Hurricane Andrew dwarfed the monetary damages caused by any previous hurricane.

The ferocity of the devastating category 5 hurricane played a role in the scope of the destruction, but another important contributing factor was the growth and development of Florida.

When the Labor Day Hurricane of 1935 slammed into Florida, the state’s population was approximately 1.6 million. In 1992, Florida’s population stood at around 13.5 million residents. Along with all those people came a bustling economy, huge metro areas and lots of infrastructure and assets.

To put some of the damage in perspective:

• During the storm 1.4 million households lost power
• 150,000 lost telephone service
• 101,241 homes were damaged, approximately 63,000 homes were destroyed and 175,000 Florida residents, mostly in Dade County, were left homeless
• Roughly 82,000 businesses were damaged or destroyed
• 32,900 acres of farmland were damaged
• 31 public schools were damaged or destroyed
• 59 hospitals and health care facilities were damaged or destroyed
• 9,500 traffic signals had to be replaced
• The cleanup required the replacement of 3,300 miles of power lines and 3,000 watermains
• Roughly 20 million cubic yards of debris had to be disposed of
• 44 people died during the storm, 15 deaths were attributed to the direct effects of the storm and 29 to indirect storm-related causes

Astonishingly, Hurricane Andrew could have been a lot worse. If the hurricane had made landfall about twenty miles north it would have hit the Miami and Fort Lauderdale metro area head on, causing even more damage, injuries and deaths.

Hurricane Andrew’s Lasting Effects on Insurance in Florida

More than half of the property damaged in Hurricane Andrew was insured, resulting in a roughly $15.5 billion payout from insurance companies are reinsurers. A flaw in the insurance industry was exposed; catastrophic loss potential estimates weren’t accurate enough to give insurers a realistic idea of what a massive natural disaster like Hurricane Andrew would cost them.

Prior to Hurricane Andrew, insurance industry experts pictured a worst-case scenario in the $7 billion range. There was an early hurricane model at the time that estimated the max would cap out around $60 billion, but that number seemed so absurdly high that most companies didn’t pay much attention to the model.

One of the main reasons for the disconnect was the insurance company’s failure to track the growth of property prices. The valuation of many coastal properties had gone up considerably in the decades leading up to Hurricane Andrew, and the rebuild and replacement costs reflected those property value appreciations.

Some industry experts believe Hurricane Andrew single handedly pushed eight insurers to insolvency. The companies that couldn’t weather Hurricane Andrew were mostly state insurers that only operated in Florida. They had a lot more exposure as a percentage of their business than the larger national insurance companies.

The claims that couldn’t be paid by the insolvent companies ended up having to be paid by the Florida Insurance Guaranty Association. This association, mandated by the Florida Insurance Guaranty Association Act, helps ensure policy holders will still get compensated for their losses if their insurer runs out of money, albeit at the cost of the taxpayer rather than their insurer.

Insurance companies made several important changes after Hurricane Andrew, none of which have been great for policyholders.

Maybe most notably, they have essentially gotten out of the business of covering flood damage and instead force home and business owners to purchase separate FEMA flood insurance plans.

They also implemented the dreaded hurricane deductibles, which are usually required if you file a homeowners damage claim due to hurricane damage. These deductibles, whether it’s for a home, boat or other piece of property, are generally based on a percentage of the home’s valuation. You may need to pay 5 to 15 percent out of your own pocket before the insurance company steps in.

The insurance companies also became more aggressive advocates for building code reform and enforcement. Stronger structures should be able to stand up better to hurricanes, meaning fewer claims after future superstorms.

Changes were also made to catastrophe modeling to ensure insurance companies had a better idea of what a worst-case scenario can look like. Insurers have since boosted their reinsurance capital to ensure they can take the hit if that worst-case scenario ever comes to pass.