Tampa Tribune
January 7,2007
SECTION:Banking
LENGTH: 1444 words
HEADLINE:Insurance Risk Forecast Called Faulty
By Kevin Begos, Tampa Tribune, Fla.
Jan. 7--The leading computer model used by the insurance industry to justify huge rate increases in coastal areas nationwide relies on faulty science, says an expert credited with helping develop it.
"I think it points to a problem with the way these modeling groups are operating," said Jim Elsner, a professor of geography at Florida State University.
Elsner was one of four experts on a panel assembled in late 2005 to provide input for the computer model by Risk Management Solutions of Newark, Calif.
He said the results, details of which were brought to his attention by the Tribune, contain assumptions that are "actually unscientific."
The flaws identified by Elsner and another panelist have nationwide implications. The expert input was used to justify loss estimates that have prompted major insurance companies to request homeowners rate increases of up to 40 percent.
The problem: RMS took a consensus of experts that there will be more storms across the Atlantic, then added its own projections about which U.S. regions would be most affected.
In an interview Saturday, Gov. Charlie Crist called RMS's actions "apparent misrepresentations" that are stunning and appalling, but in a way, part of a pattern.
"It almost doesn't shock me because this industry has been taking remarkable advantage of our people," Crist said. "Big insurance is about to face a new day in Florida."
RMS Changes Benchmark
RMS spokeswoman Shannon McKay said Elsner was not part of a second panel of experts convened in late 2006. She said the company is surprised by the criticisms.
"All of these folks were well aware of what we were ultimately going to do with the data," she said. The experts were paid for travel expenses for the discussion in Bermuda but received no other compensation.
RMS said its software is used by more than 400 insurers and financial institutions. Clients include Lloyds of London and Illinois-based State Farm Group, as well as state-run Citizens Property Insurance Corp., Florida's largest homeowners insurer.
RMS is also the official model for the Florida Hurricane Catastrophe Fund, created in 1993 after Hurricane Andrew to provide backup coverage for private insurance companies.
In March, RMS surprised the insurance industry with a dramatic change in the benchmark catastrophe software model it sells access to. Instead of using historical models based on more than 100 years of storm data, RMS announced a "medium-term" five-year model for 2006 through 2010.
The models contain specific data on tens of millions of homes, allowing insurers to estimate risk based on computer simulations of possible storms.
Based on the new model, RMS said hurricane losses would increase by 40 percent over the Gulf Coast and 25 percent to 30 percent in the other regions.
Consumer advocates tried to raise alarms at the time, with little success.
Robert Hunter, a former Texas insurance commissioner now with the Consumer Federation of America, said the primary reason for the change to the five-year model appeared to be pressure from the insurance industry.
Thomas R. Knutson, a research meteorologist with the National Oceanic and Atmospheric Administration in Princeton, N.J., and another RMS expert panelist, said the five-year timeline didn't come from the experts.
"I think that question was driven more by the needs of the insurance industry as opposed to the science," he said.
In March, RMS said the five-year model was developed in cooperation with the expert panel that included Elsner and Knutson, and that based on their perspective: "Increases in hurricane frequency should be expected along the entire U.S. coast, but will be highest in the Gulf, Florida, and the Southeast, while lower in the Mid-Atlantic and the Northeast."
"I didn't make any such statement of that type," Knutson said Friday.
Elsner said he warned RMS about flaws in the model. "I said that's not a good way of doing it," he recalled, and said RMS exaggerated the basic science "well beyond what we expected."
Though RMS said in March that the expert panel "agreed unanimously that a forward-looking view of risk should reflect a higher probability of landfalling hurricanes," Elsner said there was no consensus.
New Orleans Questions Credibility
Elsner and Hunter also criticized RMS's decision to give greater weight to a five-year projection of weather patterns over 100-plus years of storm data.
"I think it's kind of silly," Elsner said. "I think that's not a wise decision."
Robert Muir-Wood, RMS chief research officer, said Saturday the company expanded on what the expert panel was originally asked but used other scientific data to arrive at the most up-to-date estimates of hurricane landfall in particular areas. The historical data are still used in the model, he said.
In a statement, Muir-Wood said all parts of the RMS procedure have been documented and are being published in peer-reviewed scientific literature. He also said Elsner was unable to attend the second conference. Elsner is working on a new modeling system.
Though RMS is using the most recent data in its basic catastrophe model, it took the opposite approach in a report it released last month on flood risk in New Orleans. The report didn't take into account the recent improvements the U.S. Army Corps of Engineers made to the region's flood protection system, the Times-Picayune reported.
"I think it calls into question the credibility of their report," Louisiana Insurance Commissioner Jim Donelon told the paper.
Details Are A Trade Secret
Other experts in the catastrophe-modeling business have questions, too.
Long-term historical data are still the most credible, given the sparse data available for projecting the next five years, Karen Clark, chief executive officer of AIR Worldwide, said in a speech in the summer. Her company is an RMS competitor. Clark encouraged insurance companies not to replace the long-term model with the short-term one. Still, AIR has launched its own version of a five-year program for customers.
The details of how RMS arrives at its projections are considered a trade secret.
"We have never been able to get what they call the information out of the black box to review their models," said Bob Lotane, a spokesman for Florida's Office of Insurance Regulation. He said a public modeling system the state is working on should provide a way to verify the RMS projections.
Crist said information from RMS might be subpoenaed.
"There's always something you can do if the recommendations they're making are flawed and faulty," he said.
Hunter, of the Consumer Federation of America, said the modeling programs are the heart of any debate over insurance rates.
Hunter recalled that when he was Texas insurance commissioner, two companies submitted rate increase requests that included data on the same house. Using the same model, they had arrived at different risk rates.
"How could I have two so-called scientific studies giving different answers?" Hunter asked the companies, which refused to provide a detailed explanation.
Hunter refused the increases, but he said many insurance commissioners are unwilling to push companies too hard.
"Florida sent me a letter and said we're going to look into it, and that's the last I heard," he said.
RMS plans to send the new computer model to Florida officials for review next month, the company said Saturday.
Reporter Michael Fechter contributed to this report. Reporter Kevin Begos can be reached at kbegos@tampatrib.com.
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Copyright (c) 2007, Tampa Tribune, Fla.
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LOAD-DATE:January 7,2007
