The record-breaking 2004 hurricane season led to a much greater focus on aggregate risk, which will prompt changes in catastrophe risk assessment, Randall Brubaker, senior vice president of Aon Corp., told attendees at a recent Casualty Actuarial Society meeting.

Brubaker noted that companies buying reinsurance are much more interested in understanding aggregate probable maximum losses than they were before. Up until last year, most of the hurricanes were missing the United States coastline, but a shift in the upper atmospheric weather patterns resulted in above-average U.S. landfalls.

“Last year, we had a ridge of high pressure in the East that caused the hurricanes to get pulled further west into the Caribbean before turning north,” he said. “That's what caused them to converge on Florida.” The question, he continued, is whether this is a trend. “Is this going to continue and be something that we're going to see several seasons in succession? I don't think anybody knows that; at least if they do, they aren't saying anything.”

Hurricanes Charley, Frances, Ivan, and Jeanne resulted in estimated losses of $22.8 billion, according to Property Claim Service figures. Although any single hurricane is not an unusual event, the occurrence of four in one season is rare. Initially, the four events had led to wide-ranging loss estimates among catastrophe modeling companies, and actual losses differed in certain areas.

Because of this, Brubaker anticipates a number of revisions to catastrophe models in the next two years. Adjustments for frequency, damageability ratios at lower wind speeds and for select construction types, and a review of demand-surge functions based on season losses, rather than individual occurrences, can be expected, he said.

Brubaker also predicted a greater focus on the quality and completeness of exposure data for catastrophe models in the months to come. “We probably are going to see more effort and discipline about putting together exposure data for catastrophe modeling,” he said.

The effects of last year's unprecedented season on the reinsurance market were relatively slight, according to Thomas Hettinger, managing director of EMB America. In the last nine months, the reinsurance market has reacted differently from the post-hurricane Andrew period. In the past, after an event, the market would harden.

“Actuaries have developed more sophisticated catastrophe modeling techniques that have become core tools for helping companies understand their risks,” said Hettinger.

Last season's four hurricanes have led to a shift away from the traditional approach to buying reinsurance, however. “This opened people's eyes to what could happen,” he said. “In the past, people were not that worried about aggregate events. Now in Florida, many carriers are considering at least what would happen if there were two events.”

Specifically, carriers are looking at what happens when the Florida Hurricane Catastrophe Fund is used up, the speed of payment from the fund, and potential gaps in coverage created due to second events and the timing of payments, he said.

An ongoing process of change and improvement is occurring in catastrophe modeling. Carriers need to use company enterprise risk models, with catastrophe model output as a core component, Hettinger recommended. “Take this as a wake-up call to push modeling to help you,” he said.

Special Reports /

Intense Hurricane Season Changes Cat Modeling

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