AIR’s SEVERE THUNDERSTORM MODEL KEY COMPONENT TO NEW PERIL-BASED FLA. HOMEOWNERS RATES:

For the first time, homeowners rates that include a severe thunderstorm component based on sophisticated catastrophe modeling have been included as part of a rating plan subject to approval by state regulators. Florida Farm Bureau’s 2003 homeowners rate filing included an actuarial approach that develops a distinct base rate for both hurricane and severe thunderstorm perils using AIR’s hurricane and severe thunderstorm models. The models were also used extensively in the redefinition of territory lines and development of territory rating factors separately for each catastrophic peril. “In the past, rates for severe thunderstorm losses were based on estimates of expected loss derived exclusively from historical data. But the localized effects of these storms and the sparse historical data for any given location, combined with the rapidly changing construction costs and demographics of the state, make reliance on data from past events less than ideal for ratemaking purposes,” said John Rollins, chief actuary at Florida Farm Bureau. “Through the application of proven simulation techniques, the AIR model provides us with a high-resolution view of the risk,” he continued. Severe thunderstorms, which include tornadoes, hailstorms and straight-line wind gusts, are reportedly having an increasingly negative impact on insurers’ bottom line. The May 2003 outbreak of severe storms cost insurers $3.2 billion, making it the most costly catastrophe loss of the year. Multi-billion dollar severe thunderstorm losses are no longer unusual. According to ISO’s Property Claim Services (PCS), severe thunderstorm losses totaled $23 billion between 1998 and 2002. For the same period, losses from urricanes and earthquakes together totaled $9.4 billion.