Consumer advocates are calling on state regulators to stop insurers and third-party organizations from using a revised computer catastrophe modeling scheme, which they charge leads to unjustified home policy increases for consumers.
In a letter to insurance commissioners, representatives of the Washington-based Consumer Federation of America and the Center for Economic Justice in Austin, Texas, cited recent actions by risk modeler Risk Management Solutions, Newark, Calif., that they contend will lead to unjust enrichment of insurers.
On March 23, RMS announced that it was altering its procedures for estimating the future risk of hurricane damage in a manner that could lead to a 50 percent increase in losses along America's coastline from Maine to Texas.
J. Robert Hunter, director of insurance for CFA, said under the change RMS would go from using a long-term average to a 5-year average, which Mr. Hunter said breaks a promise from the insurers that periods of high hurricane activity would not cause prices to jump nor would low activity cause drops.
Mr. Hunter said he was told this while serving as insurance commissioner in Texas as an inducement to allow models and to accept "huge price increases at the time."
"RMS claims that this massive rate increase is necessary for scientific reasons, but they appear to be bowing to pressure from insurers, who provide a great deal of financial support to them," said Mr. Hunter.
RMS Executive Vice President Paul VanderMarck said the letter was a "simplistic" mischaracterization of the process his company plays in the underwriting and pricing process.
He said that modelers such as RMS use their scientific expertise to predict future loss patterns. How that translates into rate increases, particularly in the personal lines arena, is dependent on numerous other factors beyond their scope of expertise, said Mr. VanderMarck.
In addition, Mr. VanderMarck said not only regulators, but rating agencies use modelers' projections in setting capital standards that could lead to either pricing actions or exposure realignments on the part of carriers.
But Mr. Hunter contends that RMS has "dramatically" altered the scientific methodology that is being used to predict hurricanes and set consumer rates without offering a justifiable reason.
"They are breaking promises that were made to consumers over a decade ago when more sophisticated weather modeling was introduced," he said.
The RMS action was taken after extensive consultation with insurers who use the hurricane model and who have been advocating an increase in rates for disaster insurance.
"RMS is the vehicle for collusive pricing by insurers, and that is not only unfair to consumers, it is anticompetitive," said Birny Birnbaum, executive director of CEJ.
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