Shortly after Andrew devastated Florida, Allstate Insurance Company announced a plan to drop 300,000 homeowners policies in the state in order to reduce its catastrophic liability—a decision that incited rage from hundreds of thousands of policyholders trying to piece their lives back together in the wake of the hurricane. Florida's state insurance department announced it would hold a public hearing to discuss Allstate's decision.

As an expert in actuarial and insurance public policy, I flew down to attend the hearing, which became my most vivid memory from that storm's aftermath. My daughter, who lived near one the areas hit hardest by Andrew, drove me through town after town of devastated communities and damaged homes. As we approached the Holiday Inn where the hearing was to be held, I was astounded to see hundreds of people lining the streets, as crowds were trying to force themselves into the hearing. We had to stop the car, get out, and walk the rest of the way because we could not drive to the hotel with all of the foot traffic.

When the hearing began, Florida Commissioner Tom Gallagher announced that the insurer would have an hour to present its case for dropping hundreds of thousands of polices and the advocates and consumers selected to speak would each be allotted five minutes. The crowd immediately began shouting, demanding more time to articulate their positions to the insurer. Gallagher pulled the Allstate representatives into a back room. When they returned, Gallagher announced that Allstate's time to speak was reduced to 10 minutes and that advocates and consumers who wished to speak could offer their “good ideas.”

I was told that I would be given my five minutes to speak at about noon. After many angry Allstate policyholders spoke, I became worried that my remarks, which proposed specific public policy options, would fall on deaf ears. I handed my prepared remarks to the commissioner declaring that what Florida really needed was not “good ideas,” but a moratorium on termination of policies and rate increases until substantive, progressive policies could be put in place.

The crowd roared its approval. Several offered me their five minutes to speak and I, in turn, offered my suggestions in more detail. Gallagher replied that he did not have the authority to place such a moratorium. We all were disappointed.

I left the hearing, found the nearest payphone and placed a called Florida Governor Lawton Chiles' office explaining in detail what I had seen, and describing what had occurred during the hearing. Within days, the moratorium became law, allowing more time to explore other options and implement changes without further traumatizing the hundreds of thousands of Allstate policyholders.

ANDREW'S IMPACT ON THE P&C INDUSTRY

Insurers were shocked by the damage caused by Andrew and they desired to implement significant changes. National net loss ratios of the property-casualty industry increased by about seven points because homeowners insurance profits were reduced by a whopping 40 points due to Andrew.

Consumer groups recognized the need for change in how the industry did business and supported a variety of proposed policies, including the use of models in pricing, reasonable coverage restrictions (such as hurricane deductibles), and the creation or expansion of the use of state pools for the ultra-high risks such as homes on barrier islands. The insurers promised state commissioners (including me when I later became Commissioner in Texas) that their proposed changes, while painful to implement, would bring stability by including provisions for the largest types of storms, like Andrew. We had to bite the bullet: the significant price increases and coverage cutbacks would prevent future dislocations.

These changes were tested over the next two decades when four hurricanes hit Florida in 2004, and when Hurricane Katrina, pummeled the Gulf Coast in 2005. The implemented reforms seem to have worked; there was only negligible impact on overall profits or loss ratios of property-casualty insurers in those two years.

According to the Insurance Information Institute, Hurricane Andrew resulted in overall losses of approximately $28 billion, of which $17 billion (64 percent) were paid out in insured losses. Hurricane Katrina, on the other hand, resulted in overall losses nearing $125 billion, of which insurers paid out $62 billion (just under 50 percent).

If the payout ratio for Katrina had been the same as for Andrew, insurers would have paid out $80 billion, or $18 billion more than they did. The bottom line is that, if insurers had not reduced policyholder coverage and increased rates after Hurricane Andrew, they would have paid out almost 30 percent more to policyholders.

INSURERS RENEGE AFTER HURRICANE KATRINA

After the 2004 Florida Hurricanes and Hurricane Katrina, insurers seemingly “mastered” hurricanes by shifting the lion's share of the risk and costs to consumers and taxpayers through a variety of reforms. Unfortunately, the insurers broke their promises to state commissioners, including me, and instituted a second round of rate increases and coverage cutbacks, exploiting coastal homeowners. Only Florida protected consumers from this double-dip, when in 2006 they introduced progressive reform, allowing Citizen's to sell insurance at reasonable prices and Florida sold reinsurance to insurers dropping prices for home insurance by over $20 billion.

Coastal state insurance commissioners need to be cautious before allowing additional price increases or coverage restrictions for homeowners, particularly in the wake of Hurricane Isaac. In many instances, these rate increases are extreme and coverage cutbacks are unwarranted. I strongly advise commissioners to be vigilant, study all available data, and resist increasing prices or restricting coverage any further without overwhelming proof of need.