MAY 2011 - Association of Marina Industries

Industry News Continued df from Page 6“Carriers are still analyzing the impact of the model onby Ken AmrheinThe 2011 ModelIf “there’s squalls out on the Gulf Strea, a big storm’s comingsoon.” In his 1974 opus “Trying to Reason with HurricaneSeason,” Jimmy Buffet told the insurance buying public allthey need to know about a damaging storm’s impendinglandfall. If only it were this simple.In 2003, Risk Management Solutions (RMS) took a stab atpredicting catastrophic windstorm damage with a majorrevision to its North Atlantic hurricane model. In subsequentyears, revisions to that model followed. But a majorupdate released in late February has brokers asking if this,coupled with recent event sin Japan, will prove a catalyst inhardening the seemingly perpetual soft market.The marketplace knew it was coming. RMS put out the wordof its impending release of version 11.0 almost a year ago.“RMS sends out advanced versions of its revisions for carriers toreview and test as well as to help manage outcome and help setstrategy for implementation,” says Jim Sipich, a property brokerout of Crump’s San Francisco office. “This helps relieve some ofthe shock to the market when it is actually released.”Brokers are concerned with how the model update may affectpricing given increased annual average loss estimates based ondata in already high-risk areas like Florida and Texas. While somecoastal regions may actually show decreased in projected lossesbecause of more stringent building codes, this is not the case inall coastal regions. Another major concern is that any gains insuch high-risk areas will be negated by increased loss projectionsacross inland counties. For example, projection increases by asmuch as 50% in Florida and more than 90% in Texas.In its latest revision, the RMS model indicates that a greaterexpanse of inland areas suffer much more damage fromhurricanes then previously believed, in part because of laxbuilding standards and evidence of roof damage at relativelylow wind speeds.Brokers agreed that it will take some time to see the extentto which the model will affect the marketplace.“I expect most [carriers] will implement the new model tosome degree over the next year,” Sipich says. “The truth isthat no carrier wants to be the first to hit the marketplacewith new underwriting or pricing data in response to a majormodel revision like this.”7their portfolio and pricing models,” says Adam Kagan,chief of marketing relations for Crump. “as a carrier, yougo to bed thinking the exposure is ‘x.’ You wake up the nextday to see a model revision that indicates it’s actually ‘y.’ If‘y’ yields greater exposure and increased premium requirements,what is the carrier supposed to do?”Model revisions have other effects. “While it’s true that underwritingguidelines may be affected by model changes, themajor effect models can have on the marketplace has to dowith capacity carriers have and how they choose to use it,”says Rich McElreath, a Crump property broker. “Not just netcapacity, but also capacity from their treaty reinsurers.”“Instead of offering $10 million, maybe now [the offer frominsurers or reinsurers] will be %5 million,” Kagan says. “Italso affects attachment points, i.e. primary vs. excess.”Kagan is also concerned about how rating agencies willrespond to the RMS revision. “Rating agencies use modelresults to assist in analyzing a market’s financial positionand support rating analysis,” he says.A model’s effect on the insurance industry is “more aboutcapital requirements than underwriting,” says Dr. ClaireSlouch, RMS vice president. In terms of losses, the model’smain focus is severity, not frequency, she says. “Severityis a powerful measure of solvency,” she says. “Historically,model revisions are introduced in the wake of a disaster.With this model we tried to stay ahead.”While she acknowledges that the industry does not typicallyjust “take the model and incorporate it overnight,” shebelieves that data will affect the marketplace this year.It’s early, and brokers are still reviewing the impact. “Treatyreinsurance costs, specific impact of the changes on carriers’portfolios as well as the basic economic principle ofsupply and demand will all contribute to potential changesin the marketplace,” says Kagan.“Some insureds may fee more of an immediate impact thanothers, and it really is a case of ‘stay tuned.’”Kagan and other brokers stopped short of saying yes when askedif carriers historically use revised model data as a crutch to raisepremiums. “Ultimately, the model is a tool,” he says. “Would Ibe shocked if some carriers used it to justify hardening the marketand raise prices? No,” he says. “Will the entire marketplaceaccept it and follow the changes? We’ll have to wait and see.”