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Losses add up before storms strike

A company that estimates hurricane insurance losses has a grim prognosis. A consumer group suspects its motives.

By TOM ZUCCO
Published March 24, 2006

Struck by the hectic hurricane activity the past two years, a top national company that estimates insured losses from hurricanes decided to predict losses from this season and beyond.

Its analysis, the first such forward-looking report in 13 years, is ominous:

Expect property insurance losses from hurricanes that strike Florida and the Southeast this season to be 40 percent higher on average than previously thought, says Risk Management Solutions. Moreover, it warns, expect that cycle of higher losses to continue another five years.

Risk Management Solutions, a Newark, Calif., risk modeling company, based its projection on an updated risk model that took into account the increased frequency of major hurricanes in the past two years and the growing number of storms that made landfall.

Insurance companies often use risk models to adjust their rates. In this case, it would be upward.

Using RMS's revised model, for instance, insurers could seek to raise rates for a homeowner paying $1,000 a year for property insurance to $1,400.

The announcement drew the attention of the Consumer Federation of America, whose insurance director blasted the report, citing RMS's close ties to the insurance industry, a charge RMS officials deny.

RMS's last hurricane model was created in 1993, although it is periodically updated, most recently in 2003.

The latest model came as a result of a record seven major hurricanes that struck the United States during the 2004-05 seasons.

"After Hurricane Andrew, insurance companies focused on the severity of the storms," said Josh Darr, senior manager at RMS. But as the last two hurricane seasons wore on, Darr said, the focus shifted to the frequency of the storms and where they hit. The model, Darr said, needed to be improved.

"We knew we were in a more active cycle," Darr said, "but until 2004, we hadn't seen more active landfall."

More than 400 businesses, many of them insurance and reinsurance companies, pay for RMS products. Asked if creating a new hurricane risk model that could add millions in premiums to insurance companies presented a conflict of interest, Darr said no.

"A lot of insurance companies are our clients and license our software," he said, "but we're not owned by an insurance company."

RMS is owned by DMG Information, a division of Daily Mail and General Trust of London, a media conglomerate.

"If we found the opposite," Darr added, "if the cycle goes to below normal, we will adjust our rates accordingly. We've committed to an annual review of this."

Along with the insurance industry, RMS also consulted a five-member panel of experts in hurricane climatology, including Florida State University professor Jim Elsner, a specialist in climate and weather.

Elsner said he and the others were asked by RMS to meet last October in Bermuda to give their opinions on hurricane activity in the Atlantic basin and what to expect in the next several years. The experts spent half a day briefing RMS officials.

"We were asked to speak about hurricane activity in general," Elsner said. "How they (RMS) tied that to their insurance models is their business."

Besides finding it difficult to assign precise numbers to five-year storm projections, Elsner said another group of experts may have come to a different conclusion.

"It generally gets down to the choice of experts and the people you choose to include," he said. "They (RMS) probably could've found some people who would've said something different than the group they assembled.

"Their choice of experts can influence what kind of answers they get."

Bob Hunter, director of insurance for the Consumer Federation of America, found serious problems with the new risk model.

"This totally flies in the face of what we were told by the insurance industry in the early 1990s," said Hunter, who served as Texas insurance commissioner in the early 1990s and later headed the National Flood Insurance Program. "We knew there would be periods of heavy and low storm activity. They (insurers) wanted stability, so rates were adjusted.

"Now the insurance industry has decided that even though they made $44-billion in profits in 2005, they still want more."

[Last modified March 24, 2006, 02:15:43]