RMS issued a significant update to its U.S. hurricane model, RiskLink, bringing material increases in risk estimates to many insurers with exposure to hurricane states. Early indications are that the average hurricane probable maximum losses (PML) for the industry will increase dramatically — by 20 to 25 percent. Regionally, the increases could be significantly higher.
The RMS U.S. hurricane model change is described as the largest model change in RMS history. As with the 2010 AIR model change, it is based on analyses of more claims data, new research, and the availability of more computing power.
Overall insurers with spread of business will see increases in loss amounts for all return periods for all U.S. hurricane states, though for some highly specialized/localized portfolios loss figures could decrease. For a diversified portfolio, average annual loss (AAL) is increased by approximately 40 percent. With relatively more change in lower wind speed vulnerability, at the 1 in 100 and beyond risk level, the modeled loss increased somewhat less (20-25 percent). As with AIR, commercial averages increased more than residential, but unlike AIR, residential averages did increase more than 20 percent.
There is substantial variability in AAL changes by region. Increases, including surge, are about 29 percent for Florida, 115 percent for Texas and as much as 160 percent for Mid-Atlantic. Our preliminary analysis of the update shows that there is significant variability around average changes within regions, also. Substantial portions of the extra increase in Texas and the Mid-Atlantic region come from RMS’ adjustment in the inland wind hazard due to experience RMS has gained since 2003. RMS’s inland wind loss estimates, an area where historically they could be significantly lower than AIR, are expected to bring them more in line, and possibly occasionally above, AIR estimates.
While the absolute level of change in the RMS U.S. hurricane model is clearly the headline topic, there are other changes worth mentioning. Among them is the implementation of a numerical model to provide a more robust approach to storm surge hazard modeling, which uses the entire life cycle of each hurricane, rather than only landfall characteristics. High-resolution elevation information was added, along with advances in modeling vulnerability, as well as the ability to run surge-only analyses and tools for measuring the leakage of storm surge losses into wind policies.
Guy Carpenter is prepared to work with clients to help explain these developments and their implications for insurers, and provide guidance on how they can be best managed to optimal outcomes.