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Destruction is often the catalyst for creation, and that's certainly the role that Hurricane Andrew played in the creation of the Bermuda catastrophe reinsurance market.
Hurricane Andrew "largely created the market because the losses were so unexpectedly high," said Don Kramer, president of Tempest Reinsurance Co. Ltd. and vice chairman of ACE Ltd. in Hamilton, Bermuda.
The reason there wasn't a significant catastrophe reinsurance market before Andrew was simple, according to Sean Mooney, senior vp and economist at the Insurance Information Institute in New York.
"Prior to 1989, there never had been a $1 billion insured cat loss anywhere in the United States. Since 1989, we've had nine of them, so the whole perception of the potential size of catastrophes has changed. That of course, changed the demand for reinsurance, particularly the amount of cat reinsurance that would be needed," he said.
"Hurricane Andrew, reinforced by the losses stemming from the January 1994 earthquake that devastated the Northridge section of Los Angeles, changed perceptions on the potential size of megacatastrophes," said Mr. Mooney.
Charles Hays, executive vp and chief financial and administrative officer of Hamilton, Bermuda-based Mid Ocean Reinsurance Co. Ltd., launched in mid-1992 the first of the Bermuda catastrophe reinsurers. He noted that "Mid Ocean was actually conceived and people were raising money before Hurricane Andrew happened."
But, he added, "clearly Andrew was of such magnitude that it was the catalyst that really changed the market."
Tempest Re's Mr. Kramer said that insurers had been lulled into complacency by years of relatively low catastrophe losses. He said they approached their reinsurance needs in "almost as amateurish" a way as homeowners who never update their homeowners policies to reflect the increased value of their house and contents and then discover they are woefully underinsured when disaster strikes.
"So a storm hit and they were hit with huge losses," he said. Because state insurance regulators would not let them make up their losses through massive rate increases, they had to seek another solution, said Mr. Kramer.
"I think the industry wanted to see a private solution rather than a government solution," he added.
Russell Smith, vp-underwriting for Renaissance Reinsurance Ltd. in Hamilton, Bermuda, said that as a result of Andrew, "risk management entered a new level for a lot of insurance companies" as they attempted to understand the full extent of their exposures.
For reinsurers, "it was a great opportunity to do reinsurance in a more professional and more analytic way." That has meant greater use of ever-more sophisticated computer modeling, he said (see story, page 14). Mr. Smith noted that Renaissance Re is a "very model-driven operation."
As the catastrophe reinsurance market has matured, capacity has grown.
Mr. Smith said that putting together a hurricane catastrophe reinsurance program of $800 million, while not easy, is probably doable in the current market.
John Cashin, executive vp of Willis Faber North America Inc. in New York, agreed that putting together a program of such a size by tapping worldwide rather than simply Bermuda markets is doable. A Willis Faber report issued last month noted that catastrophe reinsurance buyers with good loss records enjoyed significant rate reductions on both April 1 and July 1 renewals.