Risk modelling firm Risk Management Solutions expects an average increase of 40% in the annual insurance losses predicted by its upcoming hurricane model for the Gulf Coast, Florida and the south-east of the U.S. The modeller expects increases of between 25% and 30% for the mid-Atlantic and north-east coastal regions.
The modelled losses have increased in part because RMS has started providing a view of hurricane frequency and severity in the next five years rather than basing modelled losses solely on a historical average. This will lead to a 30% increase in the modelled frequency of intense hurricanes making U.S. landfall, and a 50% increase in modelled annualised losses in the Gulf, Florida and the south-east of the U.S.
"In the past we have used a historical default," says Robert Muir-Wood, chief research officer at RMS. "That works fine if the underlying climatology is stable and you don't have phases where losses are higher or lower than average. But we had to acknowledge that it is no longer good enough to use the average."
The medium-term view of future hurricane activity was developed in cooperation with a panel of climatology specialists, which included Mark Saunders, a professor of climate prediction at University College London who provides hurricane forecasts for reinsurance broker Benfield. "We felt the five-year view would be less credible if we said it on our own," says Muir-Wood. "We took the results of that exercise and converted them into rates in the hurricane model."
RMS's new focus on future hurricanes is not the only reason for the increase in modelled losses. Muir-Wood says last season's hurricane season pushed up the historical average. "We have got to this change by updating what the historical average would be and then applying the five-year view on top," he says. "There would have been a 5% to 10% increase from just adapting the historical average."
RMS is aware of the effect the changes could have on the market. Risk modellers' increased estimated losses will have a big influence on insurers' and reinsurers' attitudes to pricing and reinsurance buying, and the amount of capital rating agencies require them to hold. But Muir-Wood says clients understand the need for the changes.
"We realize it does have a significant impact," he says. "But this has been communicated since November and the changes have been anticipated by the market. They changes are quite significant. But we are not getting clients saying: 'You must be crazy.' They have seen more than $70 billion of losses in the past two years and want to get that money back." RMS will release its updated models in May.
The modelled losses have increased in part because RMS has started providing a view of hurricane frequency and severity in the next five years rather than basing modelled losses solely on a historical average. This will lead to a 30% increase in the modelled frequency of intense hurricanes making U.S. landfall, and a 50% increase in modelled annualised losses in the Gulf, Florida and the south-east of the U.S.
"In the past we have used a historical default," says Robert Muir-Wood, chief research officer at RMS. "That works fine if the underlying climatology is stable and you don't have phases where losses are higher or lower than average. But we had to acknowledge that it is no longer good enough to use the average."
The medium-term view of future hurricane activity was developed in cooperation with a panel of climatology specialists, which included Mark Saunders, a professor of climate prediction at University College London who provides hurricane forecasts for reinsurance broker Benfield. "We felt the five-year view would be less credible if we said it on our own," says Muir-Wood. "We took the results of that exercise and converted them into rates in the hurricane model."
RMS's new focus on future hurricanes is not the only reason for the increase in modelled losses. Muir-Wood says last season's hurricane season pushed up the historical average. "We have got to this change by updating what the historical average would be and then applying the five-year view on top," he says. "There would have been a 5% to 10% increase from just adapting the historical average."
RMS is aware of the effect the changes could have on the market. Risk modellers' increased estimated losses will have a big influence on insurers' and reinsurers' attitudes to pricing and reinsurance buying, and the amount of capital rating agencies require them to hold. But Muir-Wood says clients understand the need for the changes.
"We realize it does have a significant impact," he says. "But this has been communicated since November and the changes have been anticipated by the market. They changes are quite significant. But we are not getting clients saying: 'You must be crazy.' They have seen more than $70 billion of losses in the past two years and want to get that money back." RMS will release its updated models in May.
