On March 23, Risk Management Solutions announced that its updated 2006 Atlantic hurricane model will crank out annualized insurance losses that are 40 percent higher on average for properties in the Gulf Coast, Florida and the Southeast, up to 30 percent higher for properties in the Mid-Atlantic and Northeast coastal regions.
This should have been no surprise to brokers, risk managers and insurers familiar with catastrophe models.
For months now, the big three modeling firms--RMS, EQECAT and AIR Worldwide--have promised that serious refinements are in store for their 2006 versions.
The big update to all three models is taking into account increased and more intense hurricane activity in the short to medium term, caused by climate patterns and possibly global warming. But not all the modelers will take this into account as much as RMS has. Where RMS has virtually mandated that its clients manage risks with today's increased 'cane activity in mind, AIR still takes the position that its long-term catalog provides the most valuable baseline for managing risk. There is too much uncertainty in the short term to base risk management exclusively on it, according to AIR (though AIR is releasing a near-term catalog of hurricane scenarios in May).
All of the new model versions will also be more "granular," or accurate and nuanced, when it comes to modeling how property design, building materials and codes, and occupancy types affect commercial loss. The wealth of claims data from the Fearsome Foursome in 2004 and the Three Sisters in 2005 make this possible.
Besides the big two revisions above, each modeling firm is also touting other tweaks to their system. Here are some of the highlights:
* AIR Worldwide: Katrina skewed the historical storm averages when it comes to how strong and large it was, and its record-setting storm surge, according to Frank Fischer, AIR's manager of client relations, who recently addressed the CPCU Society's Reinsurance Symposium in Philadelphia. AIR has also fine-tuned its understanding of damage functions--how the level of storm intensity relates to property carnage--especially when it comes to the duration a building is exposed to high winds.
* EQECAT: Says Tom Larsen, senior vice president, "We're supporting our clients by creating a new flood model to help them better understand the total risk, not just the hurricane wind damage."
* RMS: The 2006 model version will also tackle loss amplification factors such as demand surge, regional evacuations, local pollution, arson and looting. "To really comprehensively understand risk," says Bill Keogh, senior vice president and managing director of the Americas region, "you have to model all these factors that contribute to loss amplification from major catastrophes."
The 2006 updates will be coming to a CAT modeler near you this spring.
May 1, 2006
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