Insurance Firms Adjust for Big Storms : Coverage: Industry tries to avoid ruin by taking steps to spread the risk. Insurers try to write policies in broader geographic areas.

WASHINGTON —  In the late 1980s, the nation’s insurance industry received a series of storm warnings about potential financial devastation from renewed hurricane activity.

One 1988 study noted that insurers faced a financial exposure of $1.86 trillion along the Gulf and Atlantic coasts--an increase of 64% over 1980. Another report warned that two successive $7-billion storms “would do severe damage to the property-casualty insurance industry in the U.S. and abroad.”

Only a few years later, events overcame the dire predictions. Hurricane Hugo hit the South Carolina coast in 1989, running up an estimated $7-billion bill. Three years later, Hurricane Andrew slammed into Florida, with damage estimates running as high as $25 billion.

“The industry has learned something about its exposure in the last six years,” said Donald Segraves, executive director of the Insurance Research Council, a nonprofit organization that conducted the research.

“Insurance is a business that tends to rely on past history,” he said. “We’d never had a storm that even cost $1 billion until Hugo came along.”

The industry avoided financial ruin, Segraves said, by spreading the risk. Insurers tried to write policies in broader geographic areas rather than concentrate business in one spot. They changed their method of buying reinsurance--the way companies insure their own insurance policies.

“If that storm had hit in 1986, there would have been a failure of a substantial number of companies and others would have been impaired,” Segraves said.

But Andrew left the insurance industry wobbling. Eight companies failed under the weight of claims. State Farm has paid at least $3.6 billion. Allstate and other companies are slow to renew policies in South Florida.

Still unscathed is the National Flood Insurance Program, the federally backed insurance plan. Because Andrew’s damage largely was due to high winds, the plan escaped large claims.

But its exposure is huge. In 1975, the plan had 540,000 policies covering potential losses of $13 billion. Now, it holds 2.6 million policies with a total risk of $229 billion.

Frank Reilly, deputy federal insurance administrator and chief actuary, said the subsidized plan falls short about $300 million annually in premiums needed to cover reserves.

In the event of a big loss, the plan would have to ask Congress and the President to borrow up to $1 billion. The cost ultimately could come out of taxpayers’ pockets, but Reilly said the federal insurance program offers many benefits, including mandatory community building standards that have toughened codes in many areas.

“Sooner or later, the probability is going to work against you and it’s time to pay,” he said. “You have to weigh that potential taxpayer subsidy against the economic benefits of the program.”