Florida Braces as RMS Model Makes Landfall
Florida’s history with hurricanes has created a series of assumptions long treated as facts, none of which is more quoted than the “fact” that the exposure on the coastline is a greater risk than inland areas. That “fact” has led to decades of business and political assumptions that have shaped the market to this day.
Now, however, those assumptions are in danger of being turned upside down with the unveiling of a revised hurricane model developed by modeling firm Risk Management Services (RMS).
The RMS Version 11.0 Hurricane Model, like all models, is complicate and shielded by trade secrets. But like its competitors’ models, it calculates the probability of hurricane losses, taking into effect wind, other weather characteristics, and the density of development within a given area.
Florida is unique in that it has a state-established commission to review the various computer models and decide whether insurers can use them when setting rates. The Florida Hurricane Loss Methodology Commission was expected to approve the RMS model in a vote around the first of June.
This review process by a “pro-team” of experts including computer design engineers, meteorologists and actuaries can take months before they issue their findings and recommendations to the commission itself. But the team has already signed-off on the updated RMS 11 model. “The pro-team review was a big hurdle and a real look under the hood,” said Ryan Ogaard, senior vice president for RMS.
Ogaard said the model includes a number of significant changes, but none is having more of an impact than its increase in loss projections in inland areas. State-backed Citizens Property Insurance Corp.’s book of business is largely stable and, in fact, the model is showing that its coastal exposure has slightly decreased.
The big impact of the RMS model is on companies that specialize in writing Florida property but stay away from coastal properties. “Companies that write 10 to 50 miles away from the coastal are seeing the high-end range of the increases,” he said. “Since Florida is a peninsula; that has a large effect.”
The changes are sizable. Ogaard said some companies are seeing well over a 100 percent increase in their exposure, with most companies falling into the 50 percent to 70 percent range.
RMS has had meetings with many company executives as they work through understanding model and its impact on their business. “The industry is taking longer to look at it and there is more scrutiny,” he said.
Reshaping the Risk
Although the commission’s approval has serious consequences, especially as companies look to make rate filings in the months to come, the model is already being felt throughout the market. The loss methodology commission has yet to officially approve the model for use by insurers in the state, but rating agencies and reinsurers don’t have to wait for that approval to begin factoring in its impact.
Barry Gates, vice president for product marketing for Bankers Insurance Co., said the RMS model is creating a lot of volatility in the market. He said not only are Florida-specific companies being affected, but also national companies. “Reinsurers are using it, investors are using it, regulators are using it,” he said. “It is being felt all the way through the system.”
He said many companies are seeing double-digit increases in their exposure based on the increased loss projections in inland areas. He said it some ways Orlando, when is located in the center of the state, now has more exposure than areas around Miami.
What this means for agents and homeowners is fewer markets. Florida Association of Insurance Agents President Jeff Grady said that at least six carriers have notified agents that they are no longer taking any new business. “The new hurricane models have increased expected hurricane losses in some territories by high-double digits, and in some cases triple-digits and this is an overnight change,” he said. “There is no doubt that this is having an immediate impact and carriers are shutting down because of it.”
The RMS model could rewrite decades of political debate. For years, lawmakers from inland counties have complained that their constituents pay higher premiums to subsidize those living on the coast. If the model becomes the standard in the industry, it could change that debate and the direction of property reform.
With few companies writing policies that means even more policies will end up being funneled into Citizens. Currently, the state-run insurer has 1.3 million policyholders and represents over 15 percent of the state’s market with a total exposure of over $460 billion. Since lawmakers failed to enact any rate reform this year, the insurer only has the ability to increase rates by a statewide average 10 percent.
Bracing for increasing reinsurance rates, lawmakers inserted in this year’s property insurance cost control bill a measure that lets insurers make a separate filing for rates on reinsurance and financial interments. The increase is limited to one per year and can’t exceed 15 percent per policyholder. While this may help insurers, it is unlikely to offset a reinsurance market buffeted by catastrophic losses including those of the recent outbreak of tornadoes that is calculated to cost billions.
Cat Fund Impact
Jack Nicholson, chief operating officer for the Florida Hurricane Catastrophe Fund, the state-run reinsurance facility in which all residential insurers participate, said the RMS model, even if approved, will not have an impact on this year’s CAT Fund pricing set earlier in the year. Even if the model is incorporated into next year’s rates, it remains to be seen whether it would lead to a major change in pricing. The fund uses a variety of models to set rates and gives them different weights with models closest in their results receiving the most weight and outliers receiving much less consideration. “One model is not going to create much change because they are not weighted that heavily,” said Nicholson.
There is some $1.14 billion in Temporary Increase in Coverage Limits (TICL) monies available from the CAT Fund for individual companies wanting purchase additional reinsurance. That coverage, however, was no longer available as of June 1, the start of hurricane season and just one day before the modeling commission’s vote on the RMS model. To date, Nicholson said, there hasn’t been a run on TICL coverage, but he has heard plenty of talk about the RMS model. “If companies end up using the RMS model, it could lead to a dramatic change in their underwriting and reinsurance coverage,” he said.