On the storm front: although Florida's neighboring states have suffered a fair share of hits, none has established a hurricane catastrophe fund.

Meteorologists warned months ago that the United States could expect a very active hurricane season in 2005. The prediction didn't comfort people in Florida where 2004's tumultuous hurricane season brewed four destructive storms--Charley, Frances, Ivan and Jeanne--that swept through the state in a six-week period, causing nearly $23 billion in insured losses.

Despite this financial toll, only one insurer has declared insolvency, compared with the 12 insolvencies that followed Hurricane Andrew in 1992, which caused about $20.5 billion in current-dollar insured losses. Property/casualty insurers were able to weather the 2004 storms, individually reporting millions of dollars in losses, with help from the Florida Hurricane Catastrophe Fund. The fund, created in 1993 by a special legislative session, affords protection similar to reinsurance in order to maintain insurance capacity. It requires each insurer in the state to pay premiums into it and provides reimbursements to insurers when their losses exceed a predetermined retention level.

Florida's Exposure

In discussing hurricane risk, Florida is a special case. Almost the entire state, with its many miles of coastline, is more exposed than other neighboring states to the devastation of hurricanes spawned in the Atlantic Basin and the Caribbean. In fact, the majority of hurricane landfalls, along with the majority of property losses, insured or not, have occurred in Florida, according to the Florida Office of Insurance Regulation. Although neighboring states have suffered a fair share of hits, even multiple hits in one season, none of them hits yet to establish quite the kind of hurricane catastrophe fund that Florida instituted. With that potential exposure, many of the bigger property/casualty insurers bear a considerable risk if a series of major hurricanes hits one or more of these coastal states in one season.

"The current system is not prepared to handle huge natural catastrophes," said Edward M. Liddy, chairman, president and chief executive officer of Allstate Group, speaking at Los Angeles Town Hall in April 2005. "The strains on our system of insuring property owners for natural disasters are really beginning to show."

Liddy pointed out that the entire property/casualty industry has about $370 billion in capital. While the occurrence of a single $100 billion or $200 billion catastrophe may be remote, it is not unthinkable, he added. And if something on the scale of 1906's San Francisco earthquake were to happen now, the estimated industry damages would be roughly $400 billion, he said. "$400 billion in economic losses against slightly under $370 billion in industry capital--the math doesn't compute," Liddy said.

Such losses would cause major insurance insolvencies that would disrupt the economy as a whole, he said. "We must consider whether there is a better way to prepare and protect ourselves from such events," Liddy said.

In the wake of the 2004 hurricane season, Liddy has called for more public-private partnerships in catastrophe management. In fact, All-state has been conferring with state regulators outside of Florida about their wind pools and the need to reexamine their viability, said company spokesman Mike Trevino.

"I think there has to be a different blend of sharing between the risks that we take and the risks that either the state or the federal government takes," Liddy said during a CNBC interview. He noted, for example, that flood insurance is not covered by private insurers but by the federal government.

Providing this kind of protection against hurricane losses has been a perennial issue at the federal level, "but we haven't seen any significant motion on that," said Paul Budde, senior vice president at reinsurance intermediary Benfield and head of its catastrophe modeling unit.

A New Plan

For Florida, Liddy has urged a rethinking of how the process works in that state. After the four storms in 2004, Allstate was pushing for lowering the level of hurricane losses that insurers must bear before getting help from the catastrophe fund, as well as allowing insurers to pay a single seasonal deductible before tapping into the cat fund. The company said these changes would benefit consumers by strengthening the market and decreasing the need for future premium increases.

However, a bill signed into law by Florida Gov. Jeb Bush in June configures the cat fund to address a multiple-storm season by resetting the industry's retention, or deductible, to $4.5 billion for each of the first two storms and $1.5 billion for each storm after that.

In May, Allstate Corp. announced it would not renew nearly 95,000 homeowners policies in Florida when they expire, citing substantial losses from last year's four hurricanes and its disappointment in reforms to the Florida Hurricane Catastrophe Fund.

Allstate is withdrawing as well from the commercial property market in Florida, affecting about 16,000 policyholders. The company will continue to offer commercial auto in the state, however. The carrier said it also plans to raise rates.

Sam Miller, executive vice president of the Florida Insurance Council, said every carrier is assessing its homeowners position, noting that many insurers are raising their rates an average of 15% to 20%, and many mobile home policies aren't being renewed.

The four hurricanes last year cost Allstate $1.6 billion before taxes, of which $177 million was restored by the state hurricane fund. In effect, the storms wiped out all homeowners profit that Allstate Floridian Insurance Group, Allstate's corporate entity in Florida, had made in the 12 years since Hurricane Andrew, Liddy said.

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Key Points

* Property/casualty insurers in Florida weathered four hurricanes in 2004 with help from the Florida Hurricane Catastrophe Fund, a state-run reinsurance company.

* Despite the safety net of the Florida Hurricane Catastrophe Fund, many insurers in that state are either withdrawing their business or raising rates.

* Many of the larger property/casualty insurers bear a considerable risk if a series of major hurricanes hits one or more coastal states in one season.

How Threatened States Approach Hurricane Loss

Residual market mechanisms exist in all coastal states, and they are often referred to as coastal plans or beach plans. In Florida's case, the Citizens Property Insurance Corp, falls into this category. This state-run pool is the homeowners insurer of last resort and had 740,225 policies in force as of May 31, 2005.

"Residual markets are typically partnerships of insurers in those states that have legislated or mandated that insurers take a portion of that business based upon their market share of similar lines of business in less vulnerable areas," said Kevin Campion, executive vice president of property solutions at Benfield, the reinsurer intermediary. However, the Florida Hurricane Catastrophe Fund is a government entity.

Florida, with its long history of hurricane strikes, is the only state to have a dedicated hurricane catastrophe fund to maintain capacity for the insurance industry.

Historically, governmental involvement has not occurred until after a disaster, despite clear understanding of the potential for loss, experts said.

In New York State, there has long been concern over Long Island and its exposure, considering that it is surrounded by water and is a narrow strip of land. In 1966, the state set up a Coastal Market Assistance Program because insurance companies were wary of writing on Long Island, said Kathy Weinheimer, senior vice president of industry relations for the Independent Insurance Agents & Brokers of New York. "This was a program created by the New York State Insurance Department," she said. "It was really a joint underwriting association, a pooling arrangement."

At the time, the program was set tip for a 5,000 policy limit, Weinheimer said. "It has yet ha all these years to hit the 5,000 mark," she said. "I think the current number of policies in there is 3,800 and it has stayed pretty steady in recent years."

But contrary to Florida's situation, it's unlikely that Long Island would be hit by a Category 4 or 5 hurricane because of climate and weather, Weinheimer said. "The storm would have to travel over the colder Atlantic waters, which tend to slow it down," she said.

But the Great Hurricane of 1938, also known as The Long Island Express, came close. The storm picked tip speed and strength as it roared northward along the Atlantic coast before making landfall on Long Island, 55 miles east of New York City. The Category 3 hurricane then swept through Connecticut, Rhode Island, Massachusetts and Maine. By Red Cross estimates, it left more than 600 dead, 3,500 injured, and 75,000 buildings and 20,000 autos damaged or destroyed. In adjusted figures, the damages were greater than $ 15 billion.

Here's how some other states that frequently or infrequently suffer hurricane damage stack up:

Texas--The Lone Star State has felt the force of 42 hurricanes in the past 105 years, and for five of those years--1909, 1933, 1934, 1942 and 1989--two hurricanes roared through the state in the same season, said Tom Larsen, senior vice president, product management, of catastrophe modeler Eqecat. The costliest event for Texas occurred in August 1900, causing $22 billion in damages adjusted for 2004 standards.

In 1971, Texas established the Texas Windstorm Insurance Association, which differs from Florida's in that in the case of a big hit, it would be funded primarily by the catastrophe reserve trust fund, which stands at about $340 million, as well as insurer assessments and reinsurance, said Jim Hurley, director of public information for the state of Texas, in an e-mail. "The company assessments would be recoverable through premium surcharges over certain numbers of years or premium tax credits," he said.

Currently, legislation is pending to make a number of changes in the plan, Hurley said.

Louisiana--The state lacks a catastrophe fund but has established the Louisiana Citizens Property Insurance Corp., which administers the state's residual property insurance market, said Amy Whittington, assistant commissioner of public affairs for the Louisiana Department of Insurance. Larsen of Eqecat said that Louisiana has seen 40 events in 105 years and had three hurricanes roll through in 1985. For four years--1979, 1909, 1916 and 1926--there were two hurricanes a season. The biggest loss came with Hurricane Betsy, an adjusted $11 billion in 1965.

North Carolina--The state's General Assembly "handles hurricane recovery funding on a case-by-case, storm-by-storm basis," said Renee Hoffman, of the state's Division of Emergency Management. This state has been hit by 46 events in 105 years. It recorded five years--1944, 1954, 1955, 1964 and 1999--with three storms and four years--1933, 1949, 1958 and 1996--with two. In a 2005 market portfolio, 1954's Hurricane Hazel cost $11 billion in insured losses, Larsen said.

Georgia--The state has experienced 26 events in 105 years. The worst hurricane-related losses, more than $1 billion adjusted, came with a 1947 storm event, Larsen said.

Alabama--The state does not have a catastrophe fund, and no special funds were activated in the wake of Hurricane Ivan in 2004, said Ragan Ingrain, assistant commissioner of the Alabama Department of Insurance. This state has recorded 26 hurricanes in 105 years. In 1915 there were three events and for tour years--1916, 1995, 1998 and 1985--two hurricanes came through. In adjusted costs, Frederic at $6 billion in 1979 was the worst, Larsen said.

Hurricane Losses by the Numbers

Outlook for Loss

Here's what a 50-year loss, and the number of storms that could
trigger it, could mean if it occurred in these states during the 2005
hurricane season:

State            Events   Insured Losses

Texas            2 to 3     $12 billion
Georgia          1 to 2    $800 million
Louisiana             2      $7 billion
Alabama          2 to 3      $3 billion
South Carolina   1 to 2    $3.5 billion
North Carolina   2 to 3      $5 billion

Source: Eqecat

Top 10 Hurricanes by Estimated Insured Loss
($ Billions)

                       Estimated
Year   Hurricane   Insured Losses

1992   Andrew               $20.8
2004   Charley                7.5
2004   Ivan                   7.1
1989   Hugo                   6.4
2004   Frances                4.6
2004   Jeanne                 3.7
1998   Georges                3.4
1965   Betsy                  3.1
1995   Opal                   2.6
1999   Floyd                  2.2

Adjusted to 2004 dollars.

Source: ISO

10 Most Intense Hurricanes

Year   Hurricane                    Category

1935   Florida (Keys)                  5
1969   Camille                         5
1992   Andrew                          5
1900   Texas (Galveston)               4
1909   Louisiana (Grand Isle)          4
1915   Louisiana (New Orleans)         4
1919   Florida (Keys)/South Texas      4
1928   Florida                         4
2004   Charley                         4
2004   Ivan                            4

Measured by Saffir-Simpson Hurricane Disaster-Potential Scale

Source: ISO

A Decade of Hurricane Losses

          Number         Estimated
Year     of Events   Insured Losses

2004         5       $22.9 billion
2003         2         1.8 billion
2002         1       452.0 million
2001 *       0                   -
2000 *       0                   -
1999         5         2.6 billion
1998         2         3.8 billion
1997         1        71.0 million
1996         3         2.3 billion
1995         3         4.2 billion

* No wind event met the Property Claim Services catastrophe
definition-which is a single incident or a series of related incidents,
man-made or natural disasters, that causes insured property losses of
at least $25 million and affects a significant number of policyholders
and insurers.

Source: ISO

Texas as Target

Multiple-event hurricane seasons such as the one experienced last year are unusual, but not extremely so. In fact, 2004 was one of four years since 1900 in which five or more hurricanes made landfall in the United States--an average of about once every 25 years. Florida, the state most likely to be hit by multiple hurricanes in a year, has experienced four years since 1850 in which three or more hurricanes made landfall.

After Florida, Texas is the second most likely state to experience multiple hurricane seasons. Texans have lived through a total of nine multiple-event seasons since record keeping began in the mid-1800s. The busiest was 1886, when four storms came ashore, one of which damaged or destroyed literally every structure in the town of Indianola.

The AIR U.S. Hurricane Model estimates that Texas can expect to see two land-falling hurricanes in a single season about once every, 20 years, and three land-falling hurricanes about once every 125 years--still a frequency within the range to which most insurers manage their catastrophe risk.

Since Hurricane Andrew ripped across South Florida in 1992, the focus of the insurance industry has largely been on preparing for the next "big one," whether hurricane or earthquake. The 2004 hurricane season may well join 1992 as a defining moment for the way insurers manage catastrophe risk. Last year's hurricanes served as a painful reminder that insurers also must assess and manage the risk of multiple moderate losses--losses that can quickly mount up to very large totals.

Source: AIR, a subsidiary of Insurance Services Office Inc.