Magazine article Risk Management

Forecast Uncertain: The New RMS Hurricane Model Lowers Loss Expectations, but It Remains Unclear How This Will Affect Insurance Costs and Capacity

Magazine article Risk Management

Forecast Uncertain: The New RMS Hurricane Model Lowers Loss Expectations, but It Remains Unclear How This Will Affect Insurance Costs and Capacity

Article excerpt

In early 2011, catastrophe modeling company Risk Management Solutions (RIMS) released an update of its U.S. Atlantic hurricane model. Dubbed RMS version 11, the model would prove to be highly influential and controversial. It shook up the industry with insured loss projections spiking 20% to 100%--or more--in some locations. Some loss estimates in Texas and the mid-Atlantic states doubled, and substantial increases were seen in parts of Florida.

This update factored in lessons learned from 2008's Hurricane Ike and several other major wind events that occurred after RMS v. 10, an earlier catastrophe model update whose changes had been driven by earthquake, not wind. Version 11 also projected higher inland wind speeds and increased losses due to storm surge.

Scott Clark, risk and benefits officer for the Miami-Dade County Public School District and former RIMS president, remembers when RMS v. 11 was being rolled out. "I was in the London market at the time, and the property syndicates [at Lloyd's] were being told the model would have a significant impact on Texas and the Gulf Coast, but not in coastal parts of Florida." Clark, the risk manager of the largest employer in South Florida, was in for a rude awakening.

RMS v. 11 more than doubled the school district's probable maximum losses (PML), from nearly $900 million to almost $1.9 billion. However, his story had a happy ending. With the help of his broker at Arthur J. Gallagher & Co., Clark turned to California-based engineering and modeling company GRC Miyamoto. The firm helped the school district recode its property schedule using specific RMS codes instead of the ISO codes the school district had originally submitted. As a result, its 250-year PML was reduced by close to a billion dollars.

Clark was resourceful but also fortunate. Many others saw their PMLs and insurance premiums spike after RMS v. 11. Now, the question becomes: How will this next update affect premiums?

Enter RMS Version 13

This summer, the company is planning to release another updated hurricane model. RMS version 13 (models are named for the years in which they are released) is expected to lower loss expectations in wind-prone areas, a suggestion that has some insurance purchasers in catastrophe-prone regions hoping they will get a small cost break on premiums, especially on policies where large limits are sought.

Claire Souch, senior vice president of model solutions in RIMS' London office, said that RMS version 13 will "soften" loss expectations in most states. But compared to previous forecasts, the biggest difference will be in coastal Southeast states, such as Georgia, the Carolinas and Florida, she said.

The changes are driven by RMS research conducted since 2005, showing, among other things, that fewer hurricanes in the North Atlantic basin have made landfall. The model update, which was expected to be released by the San Francisco-based firm in July, reflects trends that RMS has observed over the last several years.

Loss assumptions are also expected to improve with regard to the phenomenon known as "leakage," or the payment of flood losses on policies that actually do not cover the peril. RMS says that insurers are doing better with this problem due to better claims handling and policy language, and because more homeowners have purchased government-issued flood coverage.

In fact, whereas loss expectation conditions will be lower along the Southeastern coast and Florida, in particular, all of RMS' hurricane property damage forecasts for the Atlantic region over the next five years will be lower than those of RMS version 11.

And yet, despite encouraging updates from RMS earlier this year, insurance buyers and brokers remain skeptical as to whether changes brought about by RMS v. 13 will have more than a minor impact on catastrophe insurance rates and industry capacity.

"I don't want to get my hopes up," said Clark. …

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