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Computer model raises hurricane risk and potential losses

Florida's homeowners insurance woes are poised for a further upset.

A new computer model set for release this spring dramatically raises the risk of a hurricane in parts of Florida previously considered safe, and is almost certain to set off more rate increases and policy cancellations.

"It's a killer," said Dale Hammond, president of Tampa-based HomeWise Insurance.

The jolt comes from Risk Management Solutions, which is revising the way its computer model treats hurricane winds; the effectiveness of safety features; and the economic repercussions of a disaster.

RMS is among the leading producers of software used by insurance companies to estimate hurricane losses. Based on recent storms, especially Hurricane Ike, which tracked north up the Ohio River Valley and swamped Chicago in 2008, the company has concluded that storms do not fall apart over land as quickly as previously believed.

The result is a 25 percent increase in expected yearly hurricane losses from Texas to Maine, and a redrawn map that shows interior parts of the nation at risk.

The new model pushes the threat of hurricanes as deep inland as Memphis and Pittsburgh, and erases the unofficial Florida rule that a resident could dodge steep rate increases by buying a house on the landward side of the state's coastal interstates.

For large swaths of Florida's interior, the hurricane risk rises steeply, climbing from 140 to 200 percent for the owner of a frame house in Central Florida.

"This moves closer to the view of the public model (used by the state to approve rates) in terms that the chances of hurricane damage in Orlando are higher that we thought and the chances of hurricane damage in St. Pete are less than we might have thought," said Locke Burt, president of Security First Insurance.

The bottom line: If the model gains acceptance, it could increase the average annual hurricane loss estimates statewide up to 15 percent, Burt said, with some coastal homeowners possibly paying a little less in premiums and inland homeowners paying more.

Burt cautioned, however, that it's difficult to make any assumptions about rates because many insurers, like his, use multiple models in proposing rates, and there are other variables for individual policies in play.

A spokeswoman for RMS downplayed any link between the new model and what homeowners will pay for insurance. "Model changes do not directly translate to changes in insurance rates," said Carolyn Krehel, citing other factors such as sinkhole losses and the cost of reinsurance.

"Of course it is going to affect consumers," responded Bill Newton, executive director of the Florida Consumer Action Network.

Moreover, he said, homeowners will have to pay more without Risk Management Solutions having to publicly prove its case about hurricane winds. That is because most of the contents of the risk model are confidential.

"We need to change the way these models are being regulated," Newton said.

At the very least, the new model is expected to drive up the demand and cost of reinsurance, said executives of two Florida insurance companies.

Hardest hit will be insurance companies that tried to lower their potential hurricane risk by moving their business away from the coast and writing more policies inland, especially in the Orlando area.

"It will penalize companies for writing in Central Florida," said Burt of Security First.

Rating agencies also are on the watch.

At a recent conference in New York, a Standard & Poor's executive said he expected inland rate increases. As insurers' own carried risk increases, he said, the property insurers will face decisions on whether to drop policies or buy added reinsurance.

The primary recipients of the extra money that homeowners will likely pay for their enlarged hurricane risks reside offshore, with reinsurers in Bermuda and London, which cover a large share of insurance company storm losses.

In exchange for that protection, they charge property insurers five to 10 times the amount of the expected loss.

• • •

Hurricanes are so rare and unpredictable that insurers rely on computer models to tell them the risk of losses. That, in turn, is used as a baseline to set premiums for homeowners or make decisions on where to withdraw, and for insurers to buy their own protection through reinsurance coverage.

RMS officials said the data that modelers rely on is so limited that a single storm such as Ike has the power to recast major presumptions.

As a hurricane, Ike had low wind levels, but as a natural disaster, it was the third-largest insured loss in U.S. history.

Because of Ike, among the new factors RMS considered was the extent that storm losses are increased by long power outages, said product management vice president Claire Souch during an interview last year.

Wind is not the only factor pushing up the company's loss predictions.

RMS records show the company has reduced the effectiveness of some home safety features, and increased post-storm losses caused by claims fraud, material shortages and delayed disaster response.

Orange County, a refuge for risk-shy insurers because it has a large inland population base, bears the biggest increases in part because of the new view of the life of hurricane winds and economic factors that drive up prices after a hurricane. In Orlando and Winter Park, the risk of hurricane loss on a frame house increases as much as 300 percent.

RMS contends it has based its loss predictions on wind measurements taken during the 2004-05 hurricanes that crisscrossed Florida. Though it entered Florida on the opposite coast, Hurricane Charley in 2004 did heavy damage to Orlando-area homes.

In nearby Ocoee, the current average yearly expected hurricane loss for a $100,000 house is $72. In the new model, it is projected to be almost $300 — the same hurricane risk that used to be assigned to Merritt Island, 57 miles east on the coast of the Atlantic Ocean.

There also are pockets of relief.

Hurricane risk in some select coastal counties, mostly in the Florida Panhandle, drop as much as half.

On the Sarasota coast, hurricane risks drop as much as 50 percent, but in areas such as Longboat Key where cuts are unlikely because almost all homes are insured by Citizens Insurance — the state-run insurer of last resort.

Meanwhile, damage estimates increase east of Interstate 75 — more than 50 percent in Arcadia and Ona.

• • •

In written responses to the Herald-Tribune, RMS contended that the new model increases Florida's hurricane risk by less than 15 percent.

But market analyses obtained by the Herald-Tribune showed much steeper impacts, in large part because insurers have shied away from the coast, where storm rates in some cases go down, and concentrated their business inland.

Nearly two dozen insurers allowed their policies to be tested on the new program. According to reports released by reinsurance brokers, those companies saw their hurricane losses rise an average of 50 percent. For some insurers, the losses doubled.

For one company, the increase was 250 percent.

"We really need two or three years to climb out of the hole without these continued shocks," said Hammond, president of HomeWise.

RMS spokeswoman Krehel said the samples were too small to reach a general conclusion. What's more, she said, "some portfolios were quite skewed geographically or by line of business."

But materials that RMS submitted to a Florida model review board show similar large increases in the state's core. Those records show projected losses for areas previously considered sheltered, such as Orlando and Gainesville, almost universally double.

Burt, president of Security First, said reinsurers have already begun to increase rates in anticipation of the February model release.

While Florida insurers are bound to immediately seek to pass those higher rates on to their customers, they cannot directly incorporate the model in their own rates until it is approved by the Florida Hurricane Loss Methodology Commission.

Commission member Jack Nicholson, chief officer of the Florida Hurricane Catastrophe Fund, said the software is under preliminary review but not likely to be seen by Florida's team of experts until later this spring. That review is, by law, confidential.

If they approve, the model could be sanctioned for use by Florida insurers in May.

Times staff writer Jeff Harrington contributed to this report.

Computer model raises hurricane risk and potential losses 01/08/11 [Last modified: Friday, January 7, 2011 9:26pm]
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