‘Near Term’ Hurricane Models Used by Insurers Under Fire

Recent “near term” hurricane prediction models based on five-year forecasts are being skewered by consumer groups urging state regulators to reject them as a basis for hiking coastal property insurance rates.

The Consumer Federation of America and the Center for Economic Justice have called upon the National Association of Insurance Commissioners to reject the new modeling methods established by Risk Management Solutions and “immediately increase regulation of non-insurer organizations whose work has a significant impact on insurance rates and availability.”

The computer catastrophe models are developed for insurers by organizations like Risk Management Solutions, Applied Insurance Research and EqeCat to estimate future damage caused by weather related events and are then used to figure homeowners’ insurance rates.

The national consumer groups have called on state insurance regulators and the NAIC – twice in the last 12 months – to reject what they say are “severely flawed hurricane projections” used by insurers to “sharply” increase rates on property insurance policies in states along the Atlantic and Gulf coasts.

“We informed the NAIC a year ago that modeling changes made by RMS would lead to unjustified rate increases for consumers, but the NAIC and every state with the exception of Florida and Georgia failed to act to protect consumers,” said J. Robert Hunter, CFA’s Director of Insurance. “Since that time, rates have risen sharply in coastal areas and impartial scientists have strongly criticized the use of ‘near term’ projections by RMS and other firms that have increased estimated loss costs by up to 90 percent in some areas. Even one of the firms that markets catastrophic risk models, AIR Worldwide Corp. has criticized the practice.”

Birny Birnbaum, executive director of CEJ, maintained that the models are not as scientific as their creators claim.

“It is a sham for RMS to claim that its catastrophe models are scientifically sound when they make an ad hoc adjustment at the end of the process that doubles loss projections,” he argued.

He, too, urged state insurance regulators to take up the issue.

“The NAIC claims the primary job of state insurance regulators is consumer protection, but it has done nothing to protect consumers from massive and unjustified rate hikes. It is a sad commentary on state insurance regulation that consumer groups have to repeatedly demand that regulators take action to stop these dramatic and unfair increases,” Birnbaum added.

RMS did not respond to a request for comment.

Ragan Ingram, assistant commissioner for the Alabama Department of Insurance, speaking on behalf of Insurance Commissioner Walter Bell, who is also president of the NAIC, declined comment at this time.

“We received the letter from Mr. Hunter and Mr. Birnbaum this week. Accordingly, we are preparing an appropriate response to their letter. Beyond that, we will have no further comment.”

Josh Brewster, spokesman for the NAIC, said, “At this point, the NAIC has not planned to issue a response to this. You can check back next week to see if that has changed.”

Randy McKee, meteorologist in charge for the National Weather Service’s Mobile, Ala. office, told Insurance Journal that in terms of weather trends, a five-year sample is meaningless.

“For any kind of study to be valid, sometimes 100 years isn’t even enough,” McKee said. “Climactic variations may last hundreds of years. How are you going to come to conclusions with five-year predictions?”

McKee said the hurricane activity witnessed over the past several years is part of a “multi-decadal trend” that began in the mid 1990s: “We’re in a pattern where we expect hurricane activity to be above normal,” he said. “These patterns usually last one to two decades.”

The models have historically been based on over a hundred years of historical data, according to the CFA/CEJ publication:

Last year, RMS announced that it would use a forecast of only five years because hurricane activity over the next few years will be above the historical average.

After the ad hoc adjustment to the models, the CFA and the CEJ called on state insurance regulators to protect consumers from arbitrary loss projections and excessive rates.

Hunter and Birnbaum said scientists and insurance experts have increasingly questioned the scientific legitimacy of the modeling changes.

“The wheels are coming off of the ‘science’ that RMS said it employed,” said Hunter.

The consumer rights duo said RMS admitted the shift to a “near term” loss projection was done in consultation with its insurer clients.

“RMS has become a vehicle for collusive pricing,” Hunter said. “The huge increase in rates that ultimately occurred because of inaction by NAIC and several states was due to pressure from insurers.”

Not all states have ignored this development. Florida does not allow the new model to be used by primary insurers and Georgia has also blocked it. However, residents of the 16 other states along the coast have been paying higher rates because of the changes adopted by RMS and other modelers, according to the consumer activists.

Sources: Consumer Federation of America
Center for Economic Justice