As any meteorologist likely would affirm, weather forecasting can be a hazardous occupation. Catastrophe modeling solutions provider Risk Management Solutions (RMS; Newark, Calif.) has gotten a taste of those hazards as it finds itself in the midst of a heated public controversy over the validity of its new predictive model. The model has been associated by Florida politicians and journalists with rising insurance rates following a quiet season that raised questions about the need for higher rates.
Stories published by the Tampa Tribune in January quoted a researcher as saying the new RMS CAT model relied on assumptions that were "unscientific," and quoted Florida Governor Charlie Crist accusing RMS of "apparent misrepresentations." Crist also was quoted as saying, "This industry has been taking remarkable advantage of our people. Big insurance is about to face a new day in Florida."
The new RMS model has been referred to as a "near-term" or "medium-term" model because it departs from the standard model, which was established in the wake of 1992's Hurricane Andrew and is based on more than a century's worth of storm record. The new model also takes into account the increased hurricane activity from 1995 to the present.
To some extent, RMS' new model is a response to the failure of the standard model to predict the consecutive record hurricane seasons of 2004 and 2005, according to an industry observer who requested anonymity. However, the vendor's attempt to arrive at a more precise model has been characterized as favoring insurers. Critics charge that it suited insurers to shift from a seven-year to a 100-year-plus model in the wake of Andrew, and now they are seeking to have it both ways by increasing rates based on a shorter-term model. By providing carriers with a methodological rationale, critics imply, RMS is in collusion with the insurers.
Such charges influenced the Speaker of the Florida House of Representatives, Marco Rubio, to request on Jan. 9, 2007 that the four companies that develop models — RMS, ISO (Jersey City, N.J.) subsidiary AIR Worldwide, Applied Research Associates (ARA; Raleigh, N.C.) and EQECAT (Oakland) — submit their models, "including the assumptions and factors used in developing the models, including any proprietary information," for review. That information, according to a letter from Rubio, was intended to inform a Jan.16 special session of the House to further its "investigation into the best methods to lower insurance rates."
However, in a detailed rebuttal to the criticisms of RMS in the press, the company's chief research officer, Robert Muir-Wood, insists that RMS is not involved in decisions clients make about rates, and notes that the new model incorporates the long-term data and accounts for the 1995-to-present period, which he says produced more than twice the number of top-intensity storms than the previous 25 years.
Still, the model likely has played a role in carriers' reevaluation of their exposure, which likely will lead them to seek more reinsurance, thus driving up their costs — and consequently policy rates — according to Don Griffin, VP of personal lines for Des Plaines, Ill.-based P&C industry trade association and lobbying group Property Casualty Insurers Association of America (PCI). While the model is scheduled to be reviewed by the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) for certification purposes in February, carriers have had access to the model since last May. However, according to Florida law, no insurance rates can be based on the model until it is certified.
In the meantime, the special session of the House has come and gone without any of the models being reviewed, according to Bob Lotane, a spokesman for Florida's Office of Insurance Regulation. Rubio's office says that he has called upon FCHLPM to evaluate and compare Florida's public model along with the four private models. Lotane says the agenda of the special legislative session was too busy and the time between Rubio's request for the models and the session was too short for review to be possible. He says he agrees that it would be fair to say that Rubio's request was more in reaction to the furor triggered by the press coverage than by any existing concern about the model on the part of the legislature. "Those press reports opened a lot of eyes and raised some questions amongst policy makers," he says.
Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio