Risk Management Solutions has confirmed its modeled hurricane activity rates for 2008 to 2012 following an elicitation with a group of the world’s leading hurricane researchers. Results of the elicitation suggest that the average risk of land-falling hurricanes in the Atlantic Basin for the next five years – known as ‘the medium-term view’ – remains at approximately the same level as has been predicted for the past two years, which is significantly above the risk averaged over the long term.

Therefore, medium-term hurricane activity rates in the 2008 version of the RMS U.S. Hurricane Model will remain unchanged from the 2007 version. The current activity rates lead to estimates of average annual insured losses that will be 40 percent higher than those predicted by the long-term mean of hurricane activity for the Gulf Coast, Florida, and the Southeast, and 25 percent to 30 percent higher for the Mid-Atlantic and Northeast coastal regions.

Seven experts from North America, Europe, and Asia participated in the annual elicitation in Miami in October. This highly respected and innovative approach to estimating hurricane landfall rates allowed leading researchers to review a range of statistical models representing alternative perspectives on potential hurricane activity in the Atlantic, including the possibility for decreasing activity over the next five years. The experts were then asked to weigh the various models to provide their best estimate of the land-falling hurricane risk in the United States and Caribbean from 2008 to 2012.

“Although U.S. hurricane-related losses have been low since 2004 and 2005, it was apparent from the views expressed among the experts that we are still in a period of elevated hurricane activity that started in 1995, and that this is likely to continue for at least several more years,” commented Dr. Claire Souch, senior director of model management at RMS. “However, there remains disagreement and uncertainty about what is driving the change in hurricane frequency, with some researchers believing it is mainly due to natural cycles in oceanic circulation, and others arguing it is primarily caused by human-induced climate change.”

The 2007 hurricane season has seen 14 named storms, which is close to the annual average of 14.7 since 1995. It is the first season ever recorded in which 40 percent of hurricanes reached Category 5 status, and the only one in which two maximum strength storms struck land. The United States coast was spared the potential devastation of hurricanes Dean and Felix due to the fortunate coincidence of a high pressure system off Florida that steered the storms south to sparsely populated areas of Mexico and Nicaragua. Had this high-pressure system been in its typical position farther north near Bermuda, the hurricanes may have taken a different track, potentially causing catastrophic damage to the United States.

Implications for mitigation and the insurance regulatory environment

Since 2005, RMS has conducted an annual review of Atlantic hurricane activity rates to provide an independent and accurate view of risk through a medium-term model, ensuring that insurers and their policyholders can understand, manage, and mitigate the risk effectively. This year’s elicitation confirms the view that the long-term historical average of hurricane activity does not make good distinctions between periods of higher and lower hurricane frequency and significantly underestimates the current level of hurricane hazard along the United States coast, leaving insurers and their policyholders more exposed than they believe.

The implications of this conclusion are particularly salient for the state of Florida. Currently, the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) must certify a catastrophe model for use in homeowners ratemaking within the state of Florida based on a series of complex data, actuarial, and meteorological standards. This certification does not affect the general use of models for internal risk modeling or reinsurance pricing, structuring, and purchasing, or use in other states. However, RMS continues to believe that the standards are not explicitly written to consider models that are based on state-of-the-art techniques that extend beyond traditional risk modeling methodologies based on the long-term average of historical activity.

Earlier in 2007, the version of the RMS model, which is based on the long-term historical average of hurricane landfalls, was certified by the FCHLPM (version 6.0a). The certification of this model does not expire, and consequently RMS will not be submitting a new model to the FCHLPM in 2008.

“We remain dedicated to engaging with the insurance industry, the regulatory environment, and public policy officials to articulate the risk facing the U.S. and to actively develop mitigation and response measures to reduce the risk,” said Mitch Sattler, vice president of public policy for RMS. “We support the ultimate goals of regulation and will continue to pursue discussions with the FCHLPM and other regulatory bodies to create standards that encourage modeling techniques aimed at characterizing risk as accurately as possible.”

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Source: Risk Management Solutions news release

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