Massachusetts should create an independent body to study the accuracy and reliability of catastrophe models, establish a catastrophic event fund to reduce the reinsurance costs of insurers and lower the number of policies written by the commonwealth’s Fair Access to Insurance Requirements Plan, a special legislative commission charged with investigating the homeowners insurance market concluded.

The commission cited a reliance on catastrophe models in establishing rates as a factor in rising homeowners insurance premiums and expressed concern with what it called a lack of disclosure of “the formulas and scientific calculations that go into creating these estimates” leading to concerns about “the accuracy and reliability of these models.”

The report proposed the creation of a catastrophic event fund to lower reinsurance costs to insurers and see the savings passed on to consumers. However, it did not recommend a funding mechanism for the fund.

Commission member Christopher Mansfield, senior vice president and general counsel of Liberty Mutual Group, co-authored a dissent to the majority’s findings. He credited the public/private panel’s work, but criticized the catastrophe fund proposal.

“We believe it is bad public policy to expose small businesses and individual policyholders from all Massachusetts counties to increased assessments so that certain individuals can enjoy cheaper insurance for a vacation house on the Cape. In the end, insurance should be risk-based; those with greater risk should pay more than those with less risk,” Mansfield said in a statement.

The commission’s report called for steps to encourage companies to pursue business in high-risk areas, including coastal regions, in order to reduce the number of policies written by the FAIR Plan. Commissioners also called for a stepped-up education campaign, including mandates for the distribution of detailed guides for purchasers of homeowners insurance and the itemization of insurance policies.

Massachusetts Division of Insurance Commissioner Nonnie Burnes previously described the coastal-area homeowners insurance situation as a Gordian Knot. Insurers who write in the coastal territories have either raised rates, declined to write new policies or withdrew from the area altogether, she said (BestWire, Nov. 1, 2007).

At the National Association of Insurance Commissioners’ winter meeting in Houston, the Property and Casualty Insurance Committee held a public hearing on the use of catastrophe modeling by rating agencies. It was the third in a series of hearings before the panel focused on the availability and affordability of insurance in coastal markets. Prior hearings focused on regulation of catastrophe modeling vendors and insurance issues in the Gulf Coast region (BestWire, Dec. 4, 2007).

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