Catastrophe modeler Risk Management Solutions says indications are its latest hurricane model—which rattled the industry’s perception of possible losses when it was released in 2011—has thus far performed well following Superstorm Sandy.

"We're ahead of the game at this point," says Michael Kistler, director of Model Solutions at RMS. "Sandy has verified the model’s approach.”

The same thing could not be said after Hurricane Ike struck Texas in 2008, Kistler admits. He says after Ike struck Galveston, Texas, RMS was "already seeing red flags." Estimates from the previous version of its hurricane model missed the mark, and RMS learned from the mistakes. .

After Sandy, RMS says its evolved model has proven to be more accurate in estimating the impacts of wind, and especially storm surge—the dominant cause of losses related to Sandy, says Kistler.

“We already see an indication that claims so far are in line with our expectations,” Kistler asserts.

RMS says insured losses from Sandy will be between $20 billion and $25 billion.

Version 11’s “heavy, location-level analysis” is accomplished by applying a Danish computer program that simulates, over time from the point of a storm’s inception, the effect of wind-generated waves while taking into account geological formations.

“The model ran for months,” Kistler says of Version 11’s development. The result is a “look at hazards street-by-street.”

Previously, the models used the more-statistical approach of calculating the average storm-surge impact on an area based on the known wind speed.

“It produced entirely the wrong result,” Kistler says.

Some uncertainties remain. Business-interruption losses are an enormous variable due to different triggers in each policy and the time element of the coverage. 

Secondly, RMS includes what it calls “storm-surge leakage” into its estimate. Kistler says RMS is conducting research and development on this phenomenon for the next model update, but basically “storm surge leakage” is defined as payments for flood losses even if the policy doesn’t cover the peril, which is excluded in basic homeowners’ insurance policy.

Payments on the excluded peril happen due to errors by adjusters or ambiguity in the contract, for instance, says Kistler. Court involvement from litigation could play a role.

Kistler says RMS released its insured-losses estimate for Sandy later than its catastrophe modeling competitors because it wanted to make sure the range was “a usable one” for the industry.

“There is a tension between a relevance that decays versus accuracy,” says Kistler, who adds that the company’s strategy came about after speaking with clients about their preference.