Canadian Underwriter

Karen Clark & Company holds briefings to address concerns about new U.S. hurricane model

April 4, 2011   by Canadian Underwriter

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Karen Clark & Company, a risk management consulting firm, is holding briefings with U.S. insurance company executives to express concerns about RMS’s upgraded hurricane model.
RMS launched its upgraded U.S. Hurricane Model on Feb. 28, 2011. The model incorporates changes made after a claims analysis of Hurricane Ike damage, which showed roofs were damaged at much lower wind speeds than expected.
The upgraded model is based in part on a re-analysis of building codes and climate factors affecting the durability of certain roofing systems in Gulf States.
“As a result of the model changes, RMS expects to see wind risk increase for all hurricane states on an industry-wide basis,” RMS said in a statement announcing the model changes. “However, individual portfolios will differ considerably depending on the region and line of business.
“On a wind-only basis, portfolios concentrated along the coast will show the smallest increase in wind losses, and may even decrease in some regions. Portfolios consisting of non-coastal exposure and commercial or industrial business will generally show the largest increases….
“Changes in loss results in the market portfolios analyzed by RMS typically range between +20% to +100%.”
RMS is currently working on upgraded hurricane models for the North Atlantic Basin, including Canada.
Karen Clark & Company says insurance company executives have expressed concerns that the new U.S. model has increased probable maximum loss (PML) estimates significantly in some areas of the United States, including Florida.
Karen Clark & Company said it developed a briefing presentation in response to specific concerns in the insurance industry regarding the new U.S. Hurricane Model.
The model “has produced PML changes of more than 100% for some companies, including many in Florida,” and as a result is “sending shockwaves through the industry,” Karen Clark & Company says in a press release.
“We have received numerous inquiries about whether companies should implement the new RMS model,” Karen Clark, president and CEO of Karen Clark & Company, said in a press release. “Of course, the short term answer is ‘No.’
“If a model changes so dramatically from one version to the next, and radically alters your risk management decisions, you’ve got to pause, test the new loss estimates for credibility, and figure out how much credence you want to give to a tool with so much inherent volatility.”
A late call to RMS’s European-based press office for comment could not be returned prior to press deadline.

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