RMS Revised Storm Model Gets Florida Okay

 

BY DANIEL HAYS

National Underwriter Online News Service

June 25, 2:38 p.m. EDT

A hurricane modeling firm–once criticized for creating a flawed storm-loss scenario that insurers used to hike coastal property rates–said a revised model has now been approved by Florida authorities.

Newark, Calif.-based Risk Management Solutions (RMS) announced that the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) re-certified the RMS Hurricane model for use in establishing residential insurance rates in the state of Florida. 

The certified version–replacing one that was rejected in May–estimates hurricane activity rates for the next five years based on a straight historical average of the number of hurricanes recorded since 1900, as required by FCHLPM standards, RMS said.

Under the earlier version submitted, RMS used a forward-looking medium-term view of hurricane activity that it said has become the “new average” since 1995, reflecting the increase in hurricane frequency and intensity being experienced in the Atlantic basin.

But the first review by the FCHLPM Professional Team found that its standards would not accommodate the RMS forward-looking medium-term view. RMS withdrew this version of its model from the certification process, and re-submitted one based on the historical average.

Its new version passed all standards set forth by the commission in its most recent Report of Activities, covering meteorology, vulnerability, actuarial, statistics, computing and other general standards that apply to models used for developing residential insurance loss costs in Florida, RMS said.

While the new model based on the historical average can now be used for residential ratemaking in Florida, RMS said it continues to recommend that insurance and reinsurance companies assess and manage risk based on the standard medium-term rates included in the rejected version 6.0 and 7.0 of the RiskLink and RiskBrowser modeling platforms.

According to the RMS statement, the historical average does not distinguish well between periods of higher and lower hurricane frequency, and significantly underestimates the current level of hurricane hazard along the U.S. coast, leaving insurers and their policyholders more exposed than they believe.

“Fundamentally, RMS is focused on providing an independent and accurate view of risk to ensure that insurers and their policyholders can understand, manage and mitigate it effectively,” said Mitch Sattler, vice president of public policy at RMS.

The earlier RMS model had been the subject of criticism by the Washington-based Consumer Federation of America (CFA) and the Center for Economic Justice (CEJ) in Austin, Texas. They said the model led to rate increases of 25 percent in Maine, and 50 percent or more along the Gulf of Mexico coastline.

J. Robert Hunter, CFA’s director of insurance, said back then that impartial scientists had strongly criticized the use of “near-term” projections by RMS.

Mr. Sattler responded at the time that RMS’s work was being misrepresented, that the objective risk-metrics provided by RMS models are based entirely on science, and noted researchers had found hurricane activity in the North Atlantic has increased since 1995–and that this period of elevated activity will last for at least another 10 years.

“The long-term historical average thus significantly underestimates the hazard posed by hurricanes for the foreseeable future,” he said.