Insurance Risk Models Rise With Elevated Storm Frequency, Severity

NEWARK, California, April 17, 2006 (ENS) - Last year's increases in hurricane landfall frequency and intensity have prompted the trend-setting company Risk Management Solutions (RMS) to increase modeled annualized insurance losses compared to those derived using long-term 1900-2005 historical average hurricane frequencies.

The insurance loss estimates will rise by 40 percent on average across the Gulf Coast, Florida and the Southeast, and by 25 to 30 percent in the Mid-Atlantic and Northeast coastal regions, the company says.

When compared with a pre-2004 historical baseline, as has been previously employed for quantifying insurance risk, the increases in modeled annualized losses are closer to 50 percent in the Gulf, Florida, and the Southeast, RMS said.

What this means for insurance customers is higher rates for the types of insurance affected by hurricanes, storms, and storm surges.

wreck

After Hurricane Katrina, demolition is the only choice for many buildings such as this one along Highway 90 in Biloxi, Mississippi. (Photo by George Armstrong courtesy FEMA)
Risk Management Solutions (RMS) provides products and services for catastrophe risk management. More than 400 insurers, reinsurers, trading companies, and other financial institutions rely on RMS models to quantify, manage, and transfer risk.

This new outlook on heightened hurricane intensity and landfall frequency will be incorporated in the updated RMS U.S. and Caribbean Hurricane Models, part of the May 2006 release of the RiskLink and RiskBrowser 6.0 catastrophe modeling platforms.

The models also will contain changes in the modeling of vulnerabilities and post-event loss amplification effects based on detailed RMS analysis of claims data from the 2004 and 2005 hurricane seasons.

"Coming off back-to-back, extraordinarily active hurricane seasons, the market is looking for leadership. At RMS, we are taking a clear, unambiguous position that our clients should manage their risks in a manner consistent with elevated levels of hurricane activity and severity," said Hemant Shah, president and CEO of RMS.

"We live in a dynamic world, and there is now a critical mass of data and science that point to this being the prudent course of action," said Shah.

This new view of risk is driven by an increase of more than 30 percent in the modeled frequency of major hurricanes making landfall in the U.S. to account for current elevated levels of hurricane activity in the Atlantic basin that are expected to persist for at least the next five years.

Major hurricanes are those that rank in Category 3, 4 and 5 on the Saffir-Simpson scale.

The increased frequency and intensity of hurricane activity in the Atlantic Ocean Basin, as observed since 1995, are driven by higher sea surface temperatures in the tropical North Atlantic and by associated changes in atmospheric circulation.

These warmer temperatures are expected to translate into a continuation of high activity in the basin, leading to a greater potential for hurricanes to make landfall at higher intensities over the next five years.

hurricane

Hurricane Wilma off the U.S. east coast October 25, 2005. Wilma was the most intense hurricane ever recorded in the Atlantic basin, devastating of the Yucatán Peninsula and southern Florida. (Photo courtesy NASA)
To address this period of elevated frequency and intensity of storms, RMS consulted with representatives from all segments of the insurance industry and updated its U.S. and Caribbean hurricane models to provide a medium-term, five-year view of risk for estimating potential catastrophe losses.

To date, catastrophe model results have been based on a long term historical average baseline.

The RMS medium term view of hurricane activity was developed in cooperation with a panel of experts in hurricane climatology convened by RMS in October 2005, which included: Dr. Jim Elsner, professor in the Department of Geography, Florida State University; Dr. Kerry Emanuel, professor in the Department of Earth, Atmospheric and Planetary Sciences, Massachusetts Institute of Technology; Tom Knutson, research meteorologist, Geophysical Fluids Dynamic Laboratory, Princeton University; and Dr. Mark Saunders, professor of Climate Prediction, Department of Space and Climate Physics, University College London.

Based on the five year perspective of this expert panel, RMS developed a methodology to update activity rates in its proprietary models based on storm intensity, storm track, and landfall region.

This methodology indicates that increases in hurricane frequencies should be expected across the entire U.S. coast, but will be highest in the Gulf, Florida, and the Southeast, while lower in the Mid-Atlantic and Northeast.

"Considerable scientific debate on the reasons for the high state of current hurricane activity continues among leading climatologists, between those who view natural, multi-decadal variability as the principal cause and those who also see a significant influence of global warming," acknowleged Dr. Robert Muir-Wood, chief research officer at RMS.

"While the experts convened by RMS hold different climatological perspectives on the underlying causes of elevated hurricane activity," said Muir-Wood, "they agreed unanimously that a forward-looking view of risk should reflect a higher probability of land-falling hurricanes than is represented by long-term historical averages."

In flood recovery guidance documents issued today for Jefferson, Orleans and St. Bernard parishes as well as portions of Plaquemines and St. Charles parishes in southern Louisiana, the Federal Emergency Management Agency (FEMA) advises communities on how to reconstruct to help minimize vulnerability to future flood events.

damage

In the days following Hurricane Katrina, which hit the Gulf Coast on August 29, 2005, the levee protecting New Orleans' Ninth Ward gave way, flooding the neighborhood and throwing a barge up on land. (Photo by Greg Henshall courtesy FEMA)
"FEMA strongly recommends communities build higher and stronger to reduce vulnerability from flooding during future hurricanes," said David Maurstad, FEMA's Mitigation Division director and administrator of the National Flood Insurance Program.

The guidance documents provide Advisory Base Flood Elevations, which are an interim product to assist communities in their rebuilding efforts while new preliminary Flood Insurance Rate Maps are being completed and provided to the communities for comment by the end of this year.

"FEMA provides this kind of advisory information to local governments, but ultimately it is state and local officials, working with their citizens, who make final decisions on land use and other building code requirements," Maurstad said.

The new FEMA flood recovery guidance takes into account newer storm data from the past 35 years including recent major hurricanes Katrina and Rita, as well as coastal land loss, degradation of coastal barriers and subsidence, or sinking land.

The guidance shows areas that have a one percent annual chance flood risk, and updates levels at which water could rise, given that one-percent-chance event.

The one percent annual chance flood elevation represents a flood that has a one percent chance of being equaled or exceeded in any given year. The one percent annual chance flood is used as the standard for setting premium rates and requirements for the National Flood Insurance Program.

"Homeowners now have their answer," said Louisiana Governor Kathleen Blanco from her office in Baton Rouge. "FEMA has finally released the long awaited and much anticipated flood advisories which are a crucial element for residents determining how to rebuild their homes. When I said 'enough was enough' in my State of the State address, I meant it with every fiber of my being. Our citizens want to make responsible decisions and this important news today will help them tremendously."

"In my meeting with Chairman Don Powell and General Strock today, we all agreed that strong, fortified levees will restore the confidence to rebuild and reinvest in southeast Louisiana," the governor said. "The good news is that the additional cost to build stronger levees is now estimated to be $4.1 billion instead of the initial estimate of $6 billion.

Because time is of the essence, I ask President Bush to submit a clear and firm request to Congress to add the $4.1 billion into the Supplemental Appropriations as it goes to the Senate floor.

FEMA says the guidance is for advisory purposes, and will not increase flood insurance premiums or flood insurance requirements of the National Flood Insurance Program.