By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®.
We could get into the microcosmic nitty-gritty of Risk Management Solutions' new U.S. hurricane model, such as how it will increase loss estimates more for inland properties.
Or, we could get macrocosmic, like how it will increase the cost of capital for insurers. They will need to buy more reinsurance, reduce their exposure, or pass on costs to insurance buyers through higher rates and deductibles and lower limits. More interesting, right?
Perhaps most interesting is asking whether the insurance world was properly prepared for this. RMS apparently warned the market for a year about the hurricane update before its release on Feb. 28.
Underwriters, however, claim that the guidance RMS gave before and what the model update actually does don't match up. It's the difference between blue and black, said Tony Mammolite, global chief of property for Bermuda-based Ironshore.
Ryan A. Barber, managing director at New York-based Marsh, observed how "shocked" people were by the magnitude of the model's effects, and as a result are looking to introduce additional models into their underwriting.
Yet the market has known for years about the modeling shortfalls that got fixed in RMS 11.0, said Tom Larsen, senior vice president of rival modeling firm Eqecat Inc., and many reinsurers have already adjusted for them.
Reinsurers already closed some of the gap between the old RMS model and the new one if they did diligent loss analyses of past events, said Serge Troeber, chief underwriting officer for Swiss Re Corporate Solutions.
Catastrophe models provide insurers with an estimate of their potential losses for hurricanes and other disasters, which help them price risk and reserve for their exposure.
The Florida Commission on Hurricane Loss Projection Methodology approved use of RMS 11.0 in the Sunshine State in early June, and ratings agency A.M. Best went on record around the same time and said it would support use of the new version.
August 1, 2011
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