A Mighty Wind
The new RMS U.S. hurricane model has
carriers and brokers worried about what it will mean at renewal
Hurricane Katrina came roaring ashore at 125 mph in 2005,
devastating the Gulf Coast. One of the most destructive storms
to hit the United States in 100 years, Katrina racked up more
than $100 billion in economic losses and $62 billion in insured
claims. As impressive as Katrina was, it was not the mightiest
storm to hit American shores. That honor goes to the 1935 Labor
Day hurricane that pounded the Florida Keys with winds
approaching 200 mph. Yet with one exception, Hurricane Hugo in
1989, the costliest storms in terms of economic and insured
losses have occurred in the last 20 years.
Considering that 2011 already holds the title of highest
loss year for global catastrophes on record—with $265
billion in economic losses, mostly from the Japan
earthquake—a bad hurricane season could be the tipping
point for insurers’ profitability.
The p-c industry has been lucky over the last few years, but
luck may be running out. We’re in the middle of an
above-normal Atlantic hurricane cycle, which began in 1995.
These cycles, known as the “tropical multi-decadal
signal,” can last 20 to 30 years or more and alternate
between above-normal and below-normal seasons.
At the same time, land and ocean temperatures are warming,
according to the National Oceanic and Atmospheric
Administration (NOAA). The power of hurricanes has increased
since the mid-1970s, NOAA says, when the most rapid increase in
global ocean and land temperatures began. Still other
scientists say a bigger factor in Category 3 to 5 storms is the
difference in temperature between the Pacific and Atlantic
Whatever the factors, the losses are mounting, making the
release of an updated hurricane model even more timely. Earlier
this year Risk Management Solutions (RMS) introduced version 11
(RMS11) of its U.S. Hurricane Model. RMS periodically updates
its models as more data become available, and the company says
that “10 times more data” was available for RMS11
than for the last version. RMS11 includes data on wind hazards,
the ability of buildings to withstand wind, wind and storm
surge models, roof durability, and lessons learned from low
winds but large storm surge events.
Michael Kistler, director of the Natural Catastrophes and
Portfolio Solution, says the new RMS model provides
“state-of-the-art, non-biased, best-in-class data
available to help clients understand their risk
exposure.” The model harnesses the latest in computing
power. The company says it ran thousands of storm simulations
to “generate the most detailed modeling study ever
designed to understand the way hurricanes decay over
land.” The update also underwent rigorous review by peers
in the academic community and the Florida Commission on
Hurricane Loss Projection Methodology.
The concern is how the new modeling will affect exposure
risks. Wind risk losses are expected to increase nationwide but
will vary by region and line of business. The smallest change
will be along coastal areas. Commercial business will show the
greatest increases, but some portfolios may see a decrease.
Changes in Florida, for example, may be less than in Texas,
Alabama, Mississippi and Louisiana, where significant loss
increases are expected.
One reason for this may be tougher building codes and better
performance in Florida for coastal residential properties. In
contrast, buildings in Texas haven’t fared as well.
Whether because of construction or the elements, the loss
difference is measurable.
How much of a change are we talking about? Marsh estimates
the loss changes may range from plus 20% to plus 100%. The
extreme range, depending on exposure factors, could range from
minus 50% to plus 300%. Texas and the Gulf could see changes
between plus 50% and plus 150%. RMS also projects significant
increases in damages for the Mid-Atlantic region, where storms
coming inland, such as Hurricane Irene in August, are weakening
at a slower pace.
Modeling offers valuable tools for the insurance industry.
It helps insurers and clients understand their vulnerability to
risks, and it helps them manage those risks. But the RMS11
model is not without controversy, and insurers were initially
cautious about adopting it. Some carriers say it will change
their exposure; others say it won’t. But acceptance is
growing. Kistler says they have a 90% adoption rate for the
wind and storm surge models among their client
base—primary carriers, reinsurers and brokers.
The other elephant in the room, of course, is its impact on
pricing. If insurers and reinsurers see more exposure in their
portfolios, will they raise prices to reflect the new risks?
The jury’s still out, but The Council’s
second-quarter commercial p-c pricing survey indicates that
RMS11 was a small factor in commercial property pricing in some
regions. The true test of the model’s impact will be felt
at January renewals, and that will depend on carriers’
appetite for risk and pain, available capacity and the severity
of the hurricane season.
Kemper is The Council’s vice president of Industry