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Hurricane Andrew's devastation of South Florida 20 years ago led to fundamental, permanent changes in the Bermuda reinsurance market and, by extension, the market worldwide.
The island changed from a domicile known mainly for its hospitality to captive insurers to becoming the major center providing property catastrophe reinsurance. Furthermore, experts say, it encouraged the now-widespread use of modeling in underwriting catastrophe reinsurance.
Eight specialized property catastrophe reinsurers formed in Andrew's wake provided much-needed capacity to an insurance marketplace devastated by the $15.5 billion hurricane, then the most severe on record and still second only to Hurricane Katrina in 2005 (see chart).
Before Andrew, “people really didn't know how to underwrite the risks, so it was really a gentleman's game,” said Neill A. Currie, president, CEO and co-founder of RenaissanceRe Holdings Inc. Ltd. RenRe remains the sole independent specializing in property cat business among Bermuda reinsurers formed after 1992.
Steven K. Bolland, president of New York-based reinsurance intermediary Gill & Roeser Inc., said Andrew created “an opportunity in the market because it was such a huge loss.”
“Hurricane Andrew was the catalyst for the formation of the Bermuda market as we know it today,” said W. Marston Becker, president and CEO of Alterra Capital Holdings Ltd. in Bermuda. “Prior to Hurricane Andrew, Bermuda really was (XL Group P.L.C.) and (Ace Ltd.) and a collection of small captive insurance companies.
“But with Andrew, the industry found itself very capacity-constrained for wind coverage, and you saw the genesis of the formation of several well-capitalized Bermuda entities with a focus on providing property catastrophe coverage,” Mr. Becker said.
That “paradigm shift” fundamentally changed how property cat business is underwritten and “will continue to evolve,” Mr. Currie said.
“We wouldn't recognize the Bermuda market today if Andrew hadn't happened,” said Paul J. Kneuer, senior vice president and chief reinsurance strategist at reinsurance intermediary Holborn Corp. in New York.
The creation of the specialty cat reinsurers “showed that when you have dislocation in the market, capital and talent can come together and pretty quickly address that issue,” Mr. Kneuer said.
As far back as 1965's Hurricane Betsy, the Bermuda market and the market in general were affected by natural and man-made catastrophes, which stressed the system's ability to pay claims and renew business, said Paul Markey, chairman of Aon Group (Bermuda) Ltd.
Brian McGuire, senior vice president at reinsurance intermediary U.S. RE Corp. in Pearl River, N.Y., said 1988's Piper Alpha explosion, 1989's Hurricane Hugo and 1990's European windstorm losses also set the stage for Andrew.
“There was a tremendous drop of retrocessional capacity, in particular for the Lloyd's syndicates; and when Andrew hit in "92, that exacerbated the situation and knocked reinsurers out of business,” Mr. McGuire said.
The new Bermuda companies “re-established capacity, particularly for the large nationwide writers of insurance business in the United States who were unable to, in 1992, fully satisfy their reinsurance needs,” Mr. McGuire said.
John DeMartini, New York-based leader of Towers Watson & Co.'s catastrophe risk management practice, said Bermuda “provided much-needed additional capacity as companies began to realize that events of the size and scope of Andrew could hit their portfolios as companies developed a better understanding of how exposed they were.”
The market was able to put together well-capitalized companies that had talented people “who were specifically focused on the property cat marketplace,” Mr. DeMartini said.
The new reinsurers found a conducive environment in Bermuda.
“You could form a company relatively easily, with fewer capital requirements,” said James Auden, managing director at rating agency Fitch Inc. in Chicago.
Also attractive was Bermuda's tax structure in which companies do not have to pay taxes on funds reserved for future losses, Mr. Bolland said.
Kevin Lee, an analyst at Moody's Ratings Service in New York, said the Bermuda reinsurers “added discipline to the property cat space.”
“By focusing purely on property cat, they were able to invest resources into modeling and underwriting that risk on a more scientific basis. I think that discipline has carried over to other (property cat reinsurers) as well beyond Bermuda,” Mr. Lee said.
Andrew coincided to a large extent with the emergence of the computer model, Mr. Bolland said.
Dave Finnis, Atlanta-based national property practice leader for Willis North America Inc., said reinsurers “really started tracking their aggregate exposure for hurricanes” after Andrew. Previously “they really didn't have a good handle on it at all.”
Mr. DeMartini said the Class of 1992 was “based in part on the belief that hurricanes could, in fact, be reasonably well-modeled.”
It was the Bermuda underwriters who took an analytical approach to underwriting property cat exposures and “were at the forefront of providing a quantitative analysis of exposure to pricing and to the capacity that they offered in the marketplace,” Mr. DeMartini said.
Anthony Mammolite, head of global property for Bermuda-based Ironshore Inc. in New York, which was formed after the 2005 hurricanes, said that evolution continues today.
“The models have a lot more weight today than they did, certainly 20 years ago or even 15 years ago for that matter,” Mr. Mammolite said.
Bermuda's development did not end with Andrew. Just as Ace and XL were formed in response to the 1980s casualty capacity crisis, further formations came after the terrorist attacks in 2001, as well as hurricanes Katrina, Rita and Wilma in 2005.