Risk Management Solutions has released a major update to its U.S. hurricane risk model which includes new datasets and developments which it says will help to advance the industry’s view of hurricane risk. The model now includes ten times more offshore wind data since the last upgrade in 2003.
Upgrades to risk models are always anticipated with trepidation by market participants as it is difficult to predict the changes that an adjusted model could make to underwriting and costs of insurance. However, progress in risk modelling is vital in order for re/insurers to write cover more accurately and for risks to be more accurately assessed.
This latest model from RMS has been described as utilizing “the most complete historical observation archive currently possible for quantifying hurricane risk,” by Associate Professor Robert Hart at Florida State University. In creating this newly updated model RMS has run thousands of storm simulations, as many as 40 times more than the historical record, creating the most detailed modelling study of how hurricanes behave after landfall (an area which has been difficult to predict). Damage caused by hurricanes once they are ashore can often be high. In addition the new model has had a lot of work on storm surge modelling put into it.
Analysis of more than $18 billion of claims data from the past 20 years combined with detailed engineering research drive the changes to building vulnerability assessments in the new model. In particular, RMS have included insight from research conducted after Hurricane Ike struck Texas in 2008. This has helped to provide greater insight into building performance in Texas.
“Claims analysis from Hurricane Ike reveals that roofs were damaged at much lower wind speeds than expected, given the understanding of construction quality and building codes,” said Dr. Claire Souch. “Following the results of our analysis, we worked closely with engineering consultants to re-examine code enforcement and building practices throughout the U.S. hurricane states, including in regions where there have been few recent hurricane landfalls to really test the building stock.”
RMS expects wind risk to increase across all hurricane states on an industry wide basis with the new risk model changes. Individual portfolios will differ depending on exposure. Some coastal areas won’t change very much with more risk increase on inland areas in some counties. Texas and the Gulf coast will now contribute more to the overall risk profile than before.
It remains to be seen how this will impact insurance rates for homeowners. Some will find that rates rise while others will find their homeowners rates may stay the same.
The changes in this latest version of the model will be extremely beneficial for modelling the risk of catastrophe bond transactions and may see cat bonds covering larger areas inland as the new model predicts hurricane damage to occur further away from the coasts.