RMS Estimates High Level of Hurricane Activity for 2008-2012

December 7, 2007

Risk Management Solutions has confirmed its modeled hurricane activity rates for 2008 to 2012, following “an elicitation with a group of the world’s leading hurricane researchers.”

The forecast concludes that, “the average risk of landfalling hurricanes in the Atlantic Basin for the next five years – known as ‘the medium-term view’ – remains at approximately the same level as has been predicted for the past two years, which is significantly above the risk averaged over the long term.”

As a result RMS said its “version of the RMS® U.S. Hurricane Model will remain unchanged from the existing 2007 version. The current activity rates lead to estimates of average annual insured losses that will be 40 percent higher than those predicted by the long-term mean of hurricane activity for the Gulf Coast, Florida, and the Southeast, and 25-30 percent higher for the Mid-Atlantic and Northeast coastal regions.”

RMS experts reviewed a range of statistical models, which it said represented “alternative perspectives on potential hurricane activity in the Atlantic, including the possibility for decreasing activity over the next five years.” Their “best estimates” produced the current forecast.

“Although U.S. hurricane-related losses have been low since 2004 and 2005, it was apparent from the views expressed among the experts that we are still in a period of elevated hurricane activity that started in 1995, and that this is likely to continue for at least several more years,” indicated Dr. Claire Souch, senior director of model management at RMS. “However, there remains disagreement and uncertainty about what is driving the change in hurricane frequency, with some researchers believing it is mainly due to natural cycles in oceanic circulation, and others arguing it is primarily caused by human-induced climate change,” she added.

RMS went on to note that the “implications of this conclusion are particularly salient for the State of Florida. Currently, the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) must certify a catastrophe model for use in homeowners rate making within the state of Florida based on a series of complex data, actuarial, and meteorological standards. This certification does not affect the general use of models for internal risk modeling or reinsurance pricing, structuring, and purchasing, or use in other states. However, we continue to believe that the standards are not explicitly written to consider models that are based on state-of-the-art techniques that extend beyond traditional risk modeling methodologies based on the long-term average of historical activity.

“Earlier in 2007, the version of the RMS model, which is based on the long-term historical average of hurricane landfalls, was certified by the FCHLPM (version 6.0a). The certification of this model does not expire, and consequently RMS will not be submitting a new model to the FCHLPM in 2008.”

Source: Risk Management Solutions – www.rms.com

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