Jeff Amy reports on risky new models – hurricane, that is (Sports Illustrated reports tomorrow)

Say “model” this time of year and even SLABBED’s most faithful readers are more likely to think “Sports Illustrated” than “hurricane”.  On looks alone, there’s no doubt which of the two models has the most immediate impact.  Long-term impact, however, is a different matter.  The new hurricane risk models will be reflected in the availability and cost of insurance coverage for years to come while SI models change from year-to-year.

Jeff Amy covers insurance issues in Alabama and coastal Mississippi for the Press Register and you don’t want to miss his latest reports on hurricane modeling – or the picture of the model: Short-term hurricane modeling driving up coastal insurance costs, say critics;Coastal homeowners may have less hurricane risk under new computer model:

For context, review Paige St. John and the Herald-Tribune nail the insurance industry! Amy brings St. John’s work close to home:

Modeling has helped insurers define the financial risks of hurricane damage. But some in the industry say that the relatively new practice of short-term modeling leads to excessive damage predictions and is likely driving up coastal insurance costs.

Before hurricane models, insurers had to look at their prior losses and try to predict future damage. For any given area, only a handful of notable hurricanes had hit in recorded history, giving too little data to reliably plot probabilities.

“Unquestionably, that method was an inadequate method,” said Charles Angell, the staff actuary with the Alabama Department of Insurance…

PML [Probable Maximum Loss] is a major factor in calculating the cash reserves or backup coverage that a company needs to avoid going broke after a severe hurricane. The cost of building reserves or buying reinsurance drives up rates along the Gulf Coast.

That influence can been seen most clearly in markets of last resort, such as the Alabama Insurance Underwriting Association or the Mississippi Windstorm Underwriting Association.

AIUA paid 60 percent of all the premiums it collected last year to buy reinsurance. The Mississippi pool paid 85 percent of its income for reinsurance last year, said Manager Joe Shumaker.

In his second story, Amy reports, “A new computer model for insurers predicts that inland homeowners face higher risks than previously believed, while coastal residents could actually face lower risks”.

Many factors are considered when a company quotes a premium on a homeowners policy. But along the Gulf Coast, models showing large potential hurricane losses have a big influence on insurance costs, and even whether carriers are willing to write wind coverage.

“It has a significant impact on what people pay,” said Mississippi Insurance Commissioner Mike Chaney…

Amy’s first story also quotes Commissioner Chaney:

Short-term models are allowed in Mississippi, Insurance Commissioner Mike Chaney said, even though he doesn’t like them. He said that in a few cases, he believes short-term models cause rates to increase by as much as 60 percent.

You won’t see a hurricane model on the cover of Sports Illustrated  – but such is the difference between fantasy and the reality of increasingly higher insurance costs.

4 thoughts on “Jeff Amy reports on risky new models – hurricane, that is (Sports Illustrated reports tomorrow)”

  1. When Allstate tried to use bogus 5 years models in Florida, Commish McCarty suspended them from the state.

    When State Farm and other insurers want to use bogus 5 year cat models in Mississippi Mike Chaney drops to his knees and opens wide.

    Anyone have any questions?


  2. your comment: ” When State Farm and other insurers want to use bogus 5 year cat models in Mississippi Mike Chaney drops to his knees and opens wide..”

    You are quite accurate in your description of Mr. Chaney.

  3. There are two important points here:

    1. Coastal property owners are paying much more in premiums than the companies expect to pay in claims, partly due to models, but the models are just another part of the collusion and anticompetitive cartel activity that should be stopped. The models are just to give enough justification for the premiums so that the Insurance Commissioners have an excuse to do nothing.

    2. The overpayments are not building up reserves in the wind pool or individual companies to pay claims when a hurricane hits. If Coast folk were overpaying premiums but most of the annual surplus was building wind pool reserves then the system could be somewhat self-correcting since the higher the reserves the less reinsurance would be needed and so premiums would come down.

    Now, the wind pool premiums are all windfall for Bermuda reinsurers and their investors and the cherry-picking companies who do sell some policies at 3x to 5x the risk pay out the profits in bonuses and dividends every year with no hurricane.

    Think about all the wind pool premiums that have been collected since 2006 with almost no claims, yet the wind pool reserves are only about one percent of the total insurance in force.

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