Why aren't insurers more scared of hurricanes?
By Andy Serwer

(FORTUNE Magazine) – YOU MIGHT THINK THAT WITH ALL THE destruction wrought by hurricanes Charley, Frances, and Ivan this season, insurance executives would be sequestered somewhere licking their wounds. Well, not exactly. As it turns out, when Ivan was bearing down on the Gulf Coast, the entire reinsurance industry (which essentially insures insurers and takes the brunt of that sort of catastrophic event) had decamped to Monte Carlo for Les Rendez-Vous de Septembre, its annual conference. And while there was some concern over the extent of the damage, for the most part the mentality was, "We can handle this."

At first glance that may be hard to understand. Obviously it's been a devastating hurricane season. The three big storms to slam the U.S. coast so far have all hit category four or above on the Saffir-Simpson scale (although Frances fell to category two by the time it made landfall). Charley did about $7 billion in damage to the U.S. Frances looks as if it did about half that, though it's tough to tell because they overlapped. And as for Ivan, the figure was unknown at presstime.

The most surprising thing to me was that none of this was a shock to the pros. For instance, I found an article on CNN's website with the headline ABOVE-NORMAL HURRICANE SEASON FORECAST, dated June 1, 2004. Turns out hurricane forecasters were predicting an abnormally active season for tropical storms, continuing a trend now a decade old. The National Oceanic Atmospheric Administration (NOAA) was looking for two to four storms in category three or higher. Why? It's a bit of a mystery, but some scientists point to warmer than normal ocean temperatures in the Atlantic. Also it appears hurricane seasons are less severe if El Niño whips up in the Pacific, as happened in 1997 and 2002. No such luck this year.

Insurers have already had to adjust to a more dangerous world. "Catastrophes in general have been more frequent and severe in the past ten years," says Loretta Waters of the Insurance Information Institute. America's two worst natural disasters--1992's Hurricane Andrew, which caused $20 billion of damage in today's dollars, and 1994's Northridge earthquake, with $12 billion of destruction--have occurred since 1990. (And of course the worst terrorism incident too: 9/11 caused $40 billion of losses.) But hurricanes are of particular concern because they are so frequent.

So why isn't the insurance industry quaking in its boots? First of all, Hurricane Andrew served as a significant wake-up call. In the storm's aftermath the state of Florida dramatically reformed its hurricane insurance practices. The Florida Hurricane Catastrophe Fund (FHCF), an industry-financed reinsurance vehicle, was established by the Florida legislature. Hurricane deductibles for homeowners were introduced. And high-risk properties were identified and separated. Andrew also pushed insurers and reinsurers to work extensively with consultants. Outfits like AIR and Risk Management Solutions developed massively complex computer models and software to track and predict losses from storms.

But what does that matter if we are getting more hurricanes? No software in the world can block a sustained wind of 150 mph. And hurricane damage will only increase as the southern coasts of the U.S. continue to be built up. Also, we haven't had a truly horrific storm in decades. "A hurricane like the one that hit Miami in 1926 or New England in 1938 would be absolutely devastating," says Karen Clark, CEO of AIR. "And as we say in the catastrophe-modeling business, It's not a question of if, it's a question of when." Why is it that the most accurate statements are often the least comforting?

ANDY SERWER, editor at large of FORTUNE, can be reached at aserwer@fortunemail.com. Read him online in Street Life on fortune.com and watch him on CNN's American Morning and In the Money.