The 2011 Model
New catastrophe models give cover for
carriers to raise rates on increased expected
If “there’s squalls out on the Gulf Stream, a
big storm’s coming soon.”
In his 1974 opus “Trying to Reason with Hurricane
Season,” Jimmy Buffett told the insurance buying public
all they need to know about a damaging storm’s impending
landfall. If only it were this simple.
In 2003, Risk Management Solutions (RMS) took a stab at
predicting catastrophic windstorm damage with a major revision
to its North Atlantic hurricane model. In subsequent years,
revisions to that model followed. But a major update released
in late February has brokers asking if this, coupled with
recent events in Japan, will prove a catalyst in hardening the
seemingly perpetual soft market.
The marketplace knew it was coming. RMS put out the word of
its impending release of version 11.0 almost a year ago.
“RMS sends out advanced versions of its revisions for
carriers to review and test as well as to help manage outcome
and help set strategy for implementation,” says Jim
Sipich, a property broker out of Crump’s San Francisco
office. “This helps relieve some of the shock to the
market when it is actually released.”
Brokers are concerned with how the model update may affect
pricing given increased annual average loss estimates based on
data in already high-risk areas like Florida and Texas. While
some coastal regions may actually show decreases in projected
losses because of more stringent building codes, this is not
the case in all coastal regions. Another major concern is that
any gains in such high-risk areas will be negated by increased
loss projections across inland counties. For example,
projection increases by as much as 50% in Florida and more than
90% in Texas.
In its latest revision, the RMS model indicates that a
greater expanse of inland areas suffer much more damage from
hurricanes then previously believed, in part because of lax
building standards and evidence of roof damage at relatively
low wind speeds.
Brokers agreed that it will take some time to see the extent
to which the model will affect the marketplace.
“I expect most [carriers] will implement the new model
to some degree over the next year,” Sipich says.
“The truth is that no carrier wants to be the first to
hit the marketplace with new underwriting or pricing data in
response to a major model revision like this.”
“Carriers are still analyzing the impact of the model
on their portfolio and pricing models,” says Adam Kagan,
chief of marketing relations for Crump. “As a carrier,
you go to bed thinking the exposure is ‘x.’ You
wake up the next day to see a model revision that indicates
it’s actually ‘y.’ If ‘y’ yields
greater exposure and increased premium requirements, what is
the carrier supposed to do?”
Model revisions have other effects. “While it’s
true that underwriting guidelines may be affected by model
changes, the major effect models can have on the marketplace
has to do with capacity carriers have and how they choose to
use it,” says Rich McElreath, a Crump property broker.
“Not just net capacity, but also capacity from their
“Instead of offering $10 million, maybe now [the offer
from insurers or reinsurers] will be $5 million,” Kagan
says. “It also affects attachment points, i.e., primary