A Century of Earth, Wind and Fire.

Losses from fire are under control, but other forces of nature wreak havoc with the bottom line.

In the 20th century, the U.S. property/casualty industry tamed fire as a cause of catastrophic loss but now faces staggering payouts from ever-increasing exposure to windstorms, hurricanes, earthquakes and other natural disasters.

For most of the first half of this century, large-scale fires called "conflagrations" caused most of the catastrophic loss for property/casualty insurers.

A 2-mile-long fire that blazed through Jacksonville, Fla., destroying 1,700 homes and commercial buildings on May 3, 1901, was typical of the dreaded and often tragic conflagrations that happened with surprising frequency between 1900 and 1936. Over those 3 1/2 decades, hardly a year went by without at least one conflagration, and some years--notably 1908 and 1922--counted as many as seven large-scale block-consuming fires.

In those days, the industry's idea of a catastrophe was a multibuilding event with losses exceeding $500,000. And like that $11 million Jacksonville fire, insured losses from most conflagrations ranged from $1 million to $15 million.

One noteworthy exception occurred April 18, 1906, when leaking gas from pipes ruptured by the devastating San Francisco earthquake began to burn, eventually claiming 28,000 homes and the greater part of the Bay City's business district. For the most part, the industry survived that conflagration's total insured losses of $350 million-- $8.9 billion in inflation-adjusted dollars--a record at that time.

The devastating fire that resulted from the San Francisco earthquake was a wake-up call that prompted the industry to encourage safer construction and better fire prevention. As a result, communities were safer and fewer insured losses occurred.

Even before the San Francisco earthquake and fire, the industry had spurred the creation in 1894 of Underwriters Laboratories, the organization that to this day tests and certifies the safety of electrical appliances. By providing economic incentives, insurers became the prime force behind fire-sprinkler installation.

Sprinkler inspections and Sprinklered Property Reports from Insurance Services Office Inc. remain a key consideration in commercial fire underwriting.

The industry's fire-prevention initiatives also focused on communities' fire-suppression capabilities with the 1889 introduction of the first uniform program for evaluating and rating municipal fire-suppression capabilities. That program became the industry's nationwide Fire Suppression Rating Schedule. Rare is the policy written today--personal or commercial--that does not take into account the ISO classification, which evaluates the water supply, fire department and fire-alarm system of the community where the risk is located.

Today's catastrophic fires are far less frequent, but wildfires that spread from brushlands and wooded areas to heavily developed areas are a major source of catastrophe loss.

According to ISO's Property Claim Services, the Oakland/Berkeley, Calif., fire of 1991 caused an estimated $1.7 billion in insured property losses, and wildfires in California's Orange County and Los Angeles in 1993 produced nearly 6,000 claims and losses of $718 million.

Windstorms

At about midcentury, windstorms--and to a lesser extent seismic activity--replaced fire as the leading cause of catastrophic loss. In the 1990s, windstorms, snowstorms, ice storms, hail, hurricanes and tornadoes have accounted for slightly more than 80% of insurer's total catastrophe claims; earthquakes, about 14%.

In 1949, through PCS, insurers established a system of estimating aggregated insured claims and losses from catastrophes. A catastrophe was a $1 million event in 1949. The average paid claim then was $137. In 1982, the catastrophe threshold was raised to $5 million, and the average paid claim was $1,500. Again in 1997, the catastrophe threshold was raised-this time to $25 million. Paid claims from catastrophes now average $2,500.

From 1900 to 1999, 68 intense hurricanes reached the continental United States. Based on loss estimates compiled by ISO's PCS unit and adjusted for inflation, hurricanes have caused $53.3 billion in insured losses to property from 1949 (the first year for which data is available) through 1999. More than two-thirds of that total--$38. 1 billion--occurred in the 11 years from 1989 to 1999, largely as a result of losses in 1992 from Hurricanes Andrew and Iniki.

Hurricane Andrew, with insured losses exceeding an inflation-adjusted $18.3 billion, remains the century's single-greatest catastrophe. When Andrew and Iniki struck, a record 63 property/casualty insurers became insolvent. Fifteen of those insolvencies were directly attributable to those storms.

Hurricane Andrew was another wake-up call that led insurers to recognize the limits of their capacity to handle growing catastrophe risk, and they began adopting new methods of rating and pricing catastrophe coverage. These methods include using evaluations of municipalities' building-code effectiveness to measure property risk, computerized catastrophe models to determine rates, state government financial mechanisms to backstop outsized catastrophe losses and new means of packaging catastrophe risk as securities to spread risk to investors through the $28.9 trillion capital markets.

Earthquakes over the past century, and especially in the 1990s, have further broadened the dimensions of catastrophe risk that insurers face. The 1989 Loma Prieta quake, with inflation-adjusted insured losses of $1.3 billion, and the Northridge quake in 1994, with inflation-adjusted losses of $14 billion, rocked property insurers as surely as the citizens of California.

PCS estimates losses from 27 catastrophes in 1999 will total $8.2 billion, making the year the fifth-highest for catastrophes in this decade-and sixth-highest of the century.

Catastrophe losses for the 10 years ended Dec. 31, 1999, will be an inflation-adjusted $99.6 billion, exceeding the total of all catastrophe losses in the preceding 40 years by 166%.

And losses will get worse as population density and development continue to grow in the country's most hurricane- and earthquake-prone states. Moreover, today's homeowners insurance packages offer much broader coverages, including guaranteed replacement cost and more generous limits on loss-of-use coverage.

The good news is that, relative to the size and density of the U.S. population and the growing ferocity of natural disasters, the number of victims appears to be declining. Improved weather-tracking and warning systems, tough mitigation measures and consumers' growing sophistication about acquiring the coverages they'll need to be made whole after a loss all have contributed to the decline.

Gary Kerney is assistant vice president, Insurance Services Office's Property Claim Services Unit.

                       Catastrophe Losses 1990-1999
Tornado              31.7%
Water Damage          0.5%
Wind/Hail/Flood       5.7%
Winter Storm         10.8%
Terrorism [*]         0.6%
Hurricane            32.5%
Earthquake           14.2%
Civil Disorders [**]  0.9%
Fire                  3.3%
(*.)World Trade Center Bombing, 1993
(**.)Los Angeles Riots, 1992
Source: Insurance Services Office Inc.
                 The Top 10 Catastrophic Events Since 1949
                                              Direct Insured
                                              Property Losses
Year Catastrophe                               ($ Millions)
1992 Hurricane Andrew                             $15,500
1994 Northridge Earthquake                         12,500
1989 Hurricane Hugo                                 4,195
1998 Hurricane Georges                              2,955
1965 Hurricane Betsy                                  515
1995 Hurricane Opal                                 2,100
1991 Oakland Fire                                   1,700
1993 Snow, Wind, Hail, Tornadoes (East Coast)       1,750
1992 Hurricane Iniki                                1,600
1999 Hurricane Floyd                                1,800
     Inflation-Adjusted
       Insured Losses [*]
Year    ($ Millions)
1992      $18,383
1994       14,035
1989        5,629
1998        3,017
1965        2,721
1995        2,293
1991        2,077
1993        2,015
1992        1,898
1999        1,800
(*.)Inflation to 1999 price levels using the Consumer Price Index.
Source: Insurance Services Office Inc.