Lets talk cat modeling and insurance rates: Karen Clark welcome to slabbed.

OK folks, I’ve written a good bit on weather modeling most of which in one way shape or fashion has its roots in the work of Karen Clark, a woman with a keen financial intellect, that literally pioneered the field. Her story is reminiscent of HAL 9000 and a South Park episode. It is also my considered opinion Ms Clark is one of the good guys in the insurance wars.  I mentioned this general topic and its importance with the last State Farm rate hike here in Mississippi using very plain english but no journalist here in Mississippi was up to the challenge of reporting it. I say that because if there is one area in the rate setting process that is completely suspect it would be in the loss assumptions indicated by the models. These concepts are equally applicable in other states besides Mississippi that now face insurance rate hikes such as our neighbor Alabama. Finally in the land where people get it, FLOIR Commish Kevin McCarty busted Allstate using bogus short-term models to calculate a 65% rate hike in Florida in 2008.

Besides Sop, Karen  Clark understands the implications. She left the company she founded, AIR Worldwide (most likely forced out IMHO), founded another company and went public with her concerns on how the information produced by those models was being misused. It was no surprise to me then when a reader sent me this link from the National Underwriter:

Catastrophe modeling firms’ hurricane damage predictions overestimated insured losses for a second year, according to a catastrophe prediction consulting firm.

Karen Clark & Company in a report said models designed to project U.S. Atlantic hurricane insured losses for the five-year period ending in 2010 “have significantly overestimated losses for the cumulative 2006 through 2009 seasons.”

“Hurricane activity is very difficult to project because the Earth’s atmosphere is very complex and has many feedback mechanisms,” said the report. “Given all of the uncertainties, near-term projections do not have sufficient credibility to be used for important insurance applications such as product pricing and establishing solvency standards.”

Predictably Karen’s wayward babies were having none of it: Continue reading “Lets talk cat modeling and insurance rates: Karen Clark welcome to slabbed.”