RMS Calls for Change to Regulatory Systems that Fail to Acknowledge Current Levels of Hurricane Risk

During the week of April 23, the Professional Team of the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) visited the RMS offices to assess the v6.0 RMS U.S. Hurricane Model. The model submitted for review incorporates our standard forward-looking estimates of medium-term hurricane activity over the next five years, which reflect the current prolonged period of increased hurricane frequency in the Atlantic basin. This model, released by RMS in May 2006, is already being used by insurance and reinsurance companies to manage the risk of losses from hurricanes in the United States.

Over the past year, RMS has been in discussions with the FCHLPM regarding use of a new method of estimating future hurricane activity over the next five years, drawing upon the expert opinion of the hurricane research community, rather than relying on a simplistic long-term historical average which does not distinguish between periods of higher and lower hurricane frequency. RMS was optimistic that the certification process would accommodate a more robust approach, so it was disappointed that the Professional Team was "unable to verify" that the company had met certain FCHLPM model standards relating to the use of long-term data for landfalling hurricanes since 1900.

As a result of the Professional Team’s decision, RMS has elected this year to submit a revised version of the model that is based on the long-term average, to satisfy the needs of the FCHLPM.

"We continue to recommend that insurance and reinsurance companies use the standard version of the RMS model as the basis for assessing and managing risks. This incorporates forward-looking estimates of medium-term hurricane activity over the next five years. Once certified by the FCHLPM, the version based on the long-term view should be used for compliance within the Florida regulatory system," said Mitch Sattler, vice president of public policy at RMS. "On May 8, we communicated our disappointment to the Florida Commission regarding the continued disconnect between the current regulatory standards and science, and the resulting implications for misunderstanding hurricane risk in Florida. We are committed to working with the FCHLPM to change what are now outdated standards that limit Cat models to use of the long-term historical average. The long-term historical average significantly underestimates the level of hurricane hazard along the U.S. coast, and there is a consensus among expert hurricane researchers that we will continue to experience elevated frequency for at least the next 10 years. The current standards make it more difficult for insurers and their policy-holders to understand, manage, and reduce hurricane risk effectively."