When the next hurricane slams into the Gulf Coast, or the next earthquake rumbles in California, attention will center first on the human suffering. But another question will follow quickly: What’s the price tag? More specifically, how much money do insurance companies stand to lose?
For property insurers like Allstate, Travelers, and State Farm, the question is an existential one. If they don’t play their cards right, a single catastrophe could bankrupt them. Hurricane Katrina in 2005, the costliest disaster in U.S. history, racked up an estimated $45 billion in insured losses. In second place is Hurricane Andrew in 1992, which cost the insurance industry $20.9 billion (measured in 2004 dollars), according to a ranking from the Congressional Research Service. The World Trade Center attack of September 11, 2001, follows at $20.1 billion.
To mitigate some of that make-or-break risk, insurers do a couple of things. Since the late 1980s, they’ve relied on increasingly sophisticated computer programs to measure their exposure to disasters. These catastrophe models, or “cat models,” calculate the damage that would be done by hurricanes, earthquakes, tornadoes, hailstorms, wildfires, terrorist attacks, and more, in thousands of possible variations. By feeding its policy data into a cat model and “geocoding” its covered properties by latitude and longitude—down to the individual street address—an insurance company can discover what its probable losses would be if, say, a Category 4 hurricane made landfall on Miami Beach rather than Boca Raton, and then price and sell its insurance accordingly.
But insurance companies also do what their policyholders do: They buy insurance, or rather, “reinsurance,” to cover some of their risk. For this, they turn to reinsurance brokers, intermediaries who analyze the risk an insurer carries, then package, price, and sell that risk to third parties. And that means insurers often turn to the Twin Cities.
The metro area, unbeknownst to most of its residents, happens to be a major global center of reinsurance brokering. It’s been at the heart of the industry’s technology developments, and more recently, in the midst of the convergence between the reinsurance industry and Wall Street. Much as Control Data Corporation was a hub that spun off numerous Minnesota technology businesses in its heyday, and Medtronic has been a generator of med-tech start-ups, a local reinsurance brokerage founded in 1957, E. W. Blanch, gave rise to an industry here that’s now headed by the world’s third-largest reinsurance broker (and Blanch’s eventual acquirer), the London-based Benfield Group and its Bloomington-based U.S. subsidiary, Benfield, Inc.
Which explains how the Twin Cities area, relatively immune from hurricanes and earthquakes, is home to a surprising number of people who are expert at calculating their costs.
