RMS has launched a new version of its North Atlantic hurricane model suite, version 13.0. The new version will give users the ability to fully analyse and quantify the risks from hurricane driven storm surge risks and the model has already been used in a catastrophe bond deal, the first storm surge cat bond MetroCat Re.
The new version of the RMS hurricane model has been long-awaited ever since the last version, v11, increased the risk profile for hurricanes dramatically which affected many catastrophe bonds attachment probabilities, expected losses and likely drove up the potential losses for insurers and reinsurers return periods under its new view of risk.
The new version is said to tone down some of the factors which caused so much controversy in the market after the release of v11 and the market expects it to produce a lower view of risk. However the new version provides much more granular modelling for hurricane driven storm surge which is likely to be another factor that will force insurers, reinsurers and perhaps catastrophe bond investors to change their assumptions.
The new model shows that storm surge can be a greater contributor to a hurricane loss than high winds. “Hurricane Sandy revealed just how real storm surge risk is,” stated Dr. Claire Souch, VP model solutions at RMS. “Our model shows there is a 20 percent chance that storm surge loss will be greater than wind loss for any U.S hurricane that makes landfall, which rises to almost 40 percent along the northeast coast of the United States — this is a risk the market can no longer afford to ignore.”
V13 of the RMS model builds on the storm surge methodology that was introduced in 2011 and is the first risk model to simulate the interaction between wind and surge throughout the entire life-cycle of each hurricane event. The model also includes new data enabling insurers to distinguish between the potential losses from residential and commercial lines of business. This is very important, as was demonstrated with Sandy, and has definite uses for the catastrophe bond market as well where some deals focus on residential and others commercial lines.
Souch commented; “Most insurance policies for commercial and industrial lines provide some level of coverage for flood loss, so having an accurate view of storm surge risk is critical to capital management and risk transfer decision-making, through to the structure and placement of cat bonds.”
With the new model comes a new medium-term rates forecast, incorporating new scientific findings into the impact that sea surface temperatures have on U.S. landfall. “Our medium-term rates forecast provides a five-year probabilistic forecast that is unique both within the insurance industry and the academic community. Our forecast gives insurance companies an additional view of the risk that may be more appropriate to future climate conditions, as opposed to using averages of historical activity,” commented Souch.
The new hurricane risk model has already been put to good use in the catastrophe bond market, as RMS provided the risk analysis for the MetroCat Re Ltd. storm surge only catastrophe bond using v13.
The MetroCat parametric index allows MTA to efficiently access capital without requiring investors to underwrite the infrastructure of the MTA. The index proxies MTA exposure to elevated water levels, using measurements at five key tidal gauge locations in the New York metropolitan area. The RMS model – used to perform the risk analysis – dynamically simulates the interaction between a storm system and the ocean throughout the entire lifecycle of each hurricane to determine the resulting on-shore surge.
The model was accepted with enthusiasm from investors involved in the deal and is another example of continued RMS momentum as the go-to provider for intelligently structured insurance-linked securities. The bond also proves that corporates and municipalities can raise funding through the capital markets with unique transactions like catastrophe bonds.
“The RMS approach of full-lifecycle hydrodynamic modeling is the only way to capture Hurricane Sandy-like experiences, where surge loss far exceeds wind loss,” commented Peter Nakada, managing director, capital markets at RMS. “Our model indicates that there is a 20 percent chance that a U.S. hurricane will cause more damage from surge than from wind, which rises to 40 percent along the northeast coast of the United States.”
We reached out to RMS to find out whether any analysis had been undertaken to look at how the new risk model would change, or not, the view of risk on any outstanding cat bonds. After v11 was released, rating agency Standard & Poor’s put a number of cat bonds on ratings watch until a new risk analysis had been undertaken.
An RMS spokesperson told us that the firm was working on a detailed change management plan with its ILS clients and that once that process was completed any specific results of relevance to the cat bond market would be made public.
We will update you on this should we hear anymore.