Catastrophe-risk modeler Risk Management Solutions is preparing the insurance industry for an update to the North Atlantic hurricane model that jolted the perception of possible losses when it was released in 2011.
RMS’ Version 13, an update to the now famous Version 11 model, is set to be out in July—with changes to assumptions related to medium-term hurricane landfall rates and the phenomenon known as “leakage.”
Claire Souch, vice president of model solutions at RMS, says Version 13 “is not a rebuild or a redo” of Version 11.
“This is certainly not the update that Version 11 was,” she says.
Based on its research—taking into account changing sea surface temperatures—RMS sees fewer hurricane landfalls from 2013-2017.
Many named storms, and more intense hurricanes, may continue to form in the Atlantic. In fact, the medium-term forecast is still higher than the historical average of hurricane activity after 1900. But due to where the storms have been forming, the forecast is for fewer landfalls—as has been seen in the last two hurricane seasons.
Nevertheless, as Souch points out, the last two hurricane seasons have also confirmed the adage, “It only takes one.” Substantial losses in the Northeast were caused by storms Sandy in 2012 and Hurricane Irene the prior year.
RMS released one range of insured losses from Sandy of between $20 billion and $25 billion.
Recent storms have been good tests for the theory of flood “leakage,” or the payment of flood losses on policies that actually do not cover the peril.
Here, RMS is changing its assumptions to more accurately the fact that the industry “has really gotten on top of the issue,” Souch says.
Insurers’ claims handling has improved and policy language has been tightened. Additionally, more homeowners have purchased flood coverage through the federal government, Souch adds.
Sandy was a “verification of this enhancement” to the model, says Souch.
RMS has been meeting with clients to discuss the changes, providing multiple sensitivity tests—what Souch calls “resiliency risk modeling”—to get a look at the impact of the new model to a company’s portfolio.
“We have remained transparent to our assumptions and uncertainties,” says Souch. “We think it is critical to understand the data going in, and we encourage clients to make their own judgments.”