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.”
Time is short so I’ll not offer much analysis and what analysis I offer is in the form of the questions I asked myself while reading it?
- What money “made the market” and how and to whom are the bonds placed (ie sold)? See this lengthy post I did a week or so back to understand why that question is important.
- What role is TARP playing in financing this deal? Inquiring minds in policymaking positions what to know. (See first bullet point)
- Who are the players making money from the act of doing the deal and how is it structured to avoid past mistakes?
Reuters has the story:
LONDON, Feb 27 (Reuters) – Standard & Poor’s has assigned a preliminary BB rating to U.S. insurer Liberty Mutual’s planned $200 million catastrophe bond, to be issued via special purpose vehicle Mystic Re II, the credit rating agency said.
In a pre-sales report published late on Thursday, S&P said Mystic Re II’s Series 2009-1 notes will transfer some potential losses by Liberty Mutual and affiliates from U.S. hurricanes and earthquakes to capital markets investors. Continue reading “News from the cat house……”
I’ve had the pleasure of chatting with Sup offline and the last email he sent me deserved a guest post on its own. Never let it be said we leave out a point of view. Our offer to Mr. Chaney to join former Louisiana Insurance Commissioner Jim Brown authoring guest post here stands as well. – sop
It is my desire to provide readers of “Slabbed” an unemotional and, hopefully, logical perspective from the industry viewpoint. I recognize the MS Gulf Coast is so different from other coastal areas. In fact, I work on the SC Coast and that is a different world. The MS Coast has always been “blue collar” and the gaming industry must be considered a “blue collar” industry for the great majority of workers. Therein is where the dilemma is.
If you allow me I will try to give you some insight as to how the industry looks at the situation. My first management position was in Underwriting in the early 1970’s. Part of our responsibility was MS and LA. We spent most of our time concerned with the LA coast as at that point the MS Gulf Coast was still trying to recover from Camille. LA was happening because of the oil business. My company began growing like crazy in coastal LA and we had a “worst nightmare” scenario. It was exactly the track Katrina took and we were right over thirty years ago. Continue reading “Sup chips in with the evolution of private market wind coverage on the Gulf Coast”
Yep it’s official ladies and gents, short term modeling doesn’t work too well according to Karen Clark:
Karen Clark & Company, independent experts in catastrophe risk, catastrophe models, and catastrophe risk management, today released a report on the performance of near term hurricane models. The report finds the models, designed to predict insured losses in the U.S. from Atlantic hurricanes for the five-year period ending in 2010, significantly overestimated these losses for the cumulative 2006 through 2008 hurricane seasons.
Slabbed readers can obtain a pdf of the report here. The press release continues:
Near term models were introduced in 2006 by the three major catastrophe modelers − AIR Worldwide (AIR), EQECAT and Risk Management Solutions (RMS). AIR initially predicted an overall annualized increase in hurricane losses of 40 percent above the long term average, but later lowered that figure to 16 percent in 2007. EQECAT predicted increases of between 35 and 37 percent, and RMS consistently predicted an overall increase of 40 percent above the long term average.
Assuming long term average annual hurricane losses of $10 billion for each year, these figures translate into cumulative insured losses for 2006 through 2008 of $37.2 billion, $40.8 billion, and $42 billion respectively, for the AIR, EQECAT and RMS models. The actual cumulative losses were $13.3 billion, far lower than the model predictions, and more than 50% below the long term cumulative average of $30 billion. Continue reading “Weather Modeling Pioneer Karen Clark Slams Use of Short Term Models”
I’ve been holding off posting on Gustav but the latest forecast track has caused quite a stir down in Bay-Waveland according to Steve who called me a few minutes ago.
Just a few years removed from the effects of Katrina the populace is understandably nervous.
I suspect the mood is similar with our neighbors to the west in Louisiana. Belle tells me friends of hers from the City are already making reservations with her in Natchez.
My own thoughts (and hopefully not just wishful thinking) is it is better to be smack in the middle of the cone of uncertainty at this point than Sunday night. Throw in Ivan from 2004 and we really need this storm to track east of Fort Walton so the joy can be more evenly spread. And with $4 dollar a gallon gas a recent memory the oil rigs could stand the break too. We’ll see soon enough. Continue reading “Gustav Forecast Track Changes…..(Updated 3X)”
Sam Friedman’s blog is a frequent stop of mine when I surf the internet for insurance issues. He is the editor of the National Underwriter, a trade publication serving the property and casualty segment of the insurance industry. I like Mr Friedman, he is a journalist first and foremost, one who examines the issues with great attention to balance in his reporting. He has opinions on insurance issues though, for instance he is against Gene Taylor’s multi peril bill HR 3121. However our offline conversations on that issue tell me his opinions do not stand in the way of doing the topic justice as he is open to reporting all sides of the issue in his blog and trade publication.
It was his post on weather modeling and it’s use in the industry for setting rates and determining the amount of risk to take on that got me interesting in the topic. In fact my first blog post dealt with that subject and featured one of Sam’s earlier posts on the topic. Featured was Karen Clark, who literally helped write the book on weather modeling:
One big problem is that catastrophe models are not reliable predictors of when or where a monster hurricane is going to strike, according to Karen Clark, vice chair of AIR Worldwide, one of the leading modeling firms. Continue reading “Sam Friedman Checks in with Another Fantastic Post on Weather Modeling and Insurance”
Over the past two weeks our readership has grown dramatically as we close in on matching our March totals in just 11days in April. Nowdy and I wish to thank our readers, especially our return visitors.
Like the March Report where I detailed some of our more popular posts for the month of March 2008 I thought I’d compile a list of my favorite insurance posts from the inception of the blog in December 2007.
We start by examining the concepts of weather modeling with some help from Sam Friedman over the National Underwriter. Small changes in the model inputs can mean big differences on your bill, as the Boston Globe noted in an editorial that we covered. The issues raised in the Globe editorial touch on the concepts of Market Transparency which is discussed here. Continue reading “A Quick Tour”