One of the biggest gusts of change that blew through the industry in 2011: The revisions that catastrophe-modeler Risk Management Solutions made to its U.S. Hurricane Model.
Loss results for portfolios that RMS analyzed, based on the revisions, increased from 20 percent to as much as 100 percent.
"We didn't want to be an event," says Ryan Ogaard, senior vice president of model management for RMS. "But these were big changes. We understand that."
The updates to the model, incorporated into RMS Version 11.0 and based on a deep analysis of billions of dollars in claims and reams of other data, increase wind-related loss estimates for noncoastal areas and even inland states.
The changes—which actually have lowered some risk estimates for coastal areas in Florida and elsewhere—prompted one reinsurance brokerage executive to observe: "Basically, this makes Ohio a coastal state."
As the changes have filtered through risk portfolios, the impact on reinsurance rates for property exposures has been significant, especially for those with significant risk concentrations in Texas and the Gulf States.
Pina Albo, president of the reinsurance division for Munich Reinsurance America, says June and July rates went up in the 10-plus percent range for large U.S. property renewals—a bump she believes was due in no small part to RMS Version 11.0.
Numerous other insurance executives also have mentioned the model changes during quarterly earnings calls and various conferences, citing it as an important part of the equation (which includes higher catastrophe losses, lower investment gains and a decrease in favorable prior-year reserve releases) that is leading to both rate increases and a likely turn in the soft market.
It was a busy year for RMS: The modeler also updated its wind model in Europe. Ogaard says RMS "hasn't heard too much" about the European adjustments, but the company is still explaining nuances of Version 11.0, including its medium-term rates for hurricane occurrence and new storm-surge projections that could result in flood losses, even on a wind policy.
"It was harder than we expected for the industry to understand these aspects," says Ogaard. "The baseline aspects of the model are largely put to bed, but we are still talking about these specific issues."
Ogaard says RMS has no definite plans to make any changes to Version 11.0.
"You can't tone [the findings] down [simply] because they are hard to deal with," he says. "We have to stay true to our mission to give the best possible view of risk."
To further enable the industry's use of RMS' new data, the modeler plans to develop tools around the model to "open the black box" and make it "easier to dig into.
"We seek to be more transparent than ever and allow our clients to fully get the benefits of our products," Ogaard adds.
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