Short-term hurricane loss models ineffective: Karen Clark & Company

Insured losses resulting from hurricanes cannot be predicted on a short-term horizon, says Karen Clark & Company.
Near-term models, designed to project insured losses from Atlantic hurricanes in the United States for the five-year period ending in 2010, have significantly overestimated losses for the cumulative 2006 through 2009 seasons, a Karen Clark release says.
Three major catastrophe modellers introduced near-term models in 2006 following the destructive 2004 and 2005 hurricane seasons.
Each of the companies, AIR Worldwide (AIR), EQECAT and Risk Management Solutions (RMS), initially projected insured losses at least 35% above the long-term average for the period 2006 through 2010.
According to Karen Clark & Company, AIR lowered its figure to approximately 16% in 2007; EQECAT made only minor adjustments to its original estimate of loss increases between 35 and 37%; and RMS, despite modifications to its model in 2009, still predicted losses above the long-term average.
Assuming long-term average annual insured hurricane losses of $10 billion per year, these figures translate into cumulative insured losses for 2006 through 2009 of $48.8 billion, $54.5 billion and $54.6 billion, respectively, for the AIR, EQECAT and RMS models, Karen Clark & Company said in a press release.
The actual cumulative losses were $13.3 billion, far lower than the model predictions, and only one-third the long-term cumulative average of $40 billion.
“This latest study further supports our previous findings that a short-term horizon is not sufficient for credibly estimating insured losses from hurricanes,” said Karen Clark, president and CEO of Karen Clark & Company.
“Hurricane activity changes markedly from year to year, and the 2004 and 2005 seasons have proven not to be harbingers of a continuing trend,” she continued.
“Given all the uncertainties, near-term projections do not have sufficient credibility to be used for important insurance applications such as product pricing and establishing solvency standards.”