Risk Management Solutions Predicts Hurricane Activity to Increase Losses by 40 Percent in Florida and Gulf Coast

March 23, 2006

Risk Management Solutions, Newark, Calif., expects increases in hurricane landfall frequencies will increase modeled annualized insurance losses by 40 percent on average across the Gulf Coast, Florida and the Southeast, and by 25 to 30 percent in the Mid-Atlantic and Northeast coastal regions.

This new view of risk is driven by an increase of more than 30 percent in the modeled frequency of major (Saffir-Simpson Category 3-5) hurricanes making landfall in the United States to account for current elevated levels of hurricane activity in the Atlantic basin that are expected to persist for at least the next five years. When compared with a pre-2004 historical baseline that had been previously employed for quantifying insurance risk, the increases in modeled annualized losses are closer to 50 percent in the Gulf, Florida, and the Southeast.

The increased frequency and intensity of hurricane activity in the Atlantic Ocean Basin, as observed since 1995, are driven by higher sea surface temperatures in the tropical North Atlantic and by associated changes in atmospheric circulation. Those warmer temperatures are expected to translate into a continuation of high activity in the basin, leading to a greater potential for hurricanes to make landfall at higher intensities over the next five years.

To address the period of elevated frequency and intensity of storms, RMS consulted with representatives from all segments of the insurance industry and updated its U.S. and Caribbean hurricane models to provide a ‘medium-term’ (five-year) forward-looking view of risk for estimating potential catastrophe losses. To date, catastrophe model results have been based on a long-term historical average baseline, the company said.

The RMS medium-term view of hurricane activity was developed in cooperation with a panel experts in hurricane climatology including: Dr. Jim Elsner, Professor in the Department of Geography, Florida State University; Dr. Kerry Emanuel, Professor in the Department of Earth, Atmospheric and Planetary Sciences, Massachusetts Institute of Technology; Tom Knutson, Research Meteorologist, Geophysical Fluids Dynamic Laboratory, Princeton University; and Dr. Mark Saunders, Professor of Climate Prediction, Department of Space and Climate Physics, University College London.

“Considerable scientific debate on the reasons for the high state of current hurricane activity continues among leading climatologists, between those who view natural, multi-decadal variability as the principal cause and those who also see a significant influence of global warming,” said Dr. Robert Muir-Wood, chief research officer at RMS. “While the experts convened by RMS hold different climatological perspectives on the underlying causes of elevated hurricane activity, they agreed unanimously that a forward-looking view of risk should reflect a higher probability of land-falling hurricanes than is represented by long-term historical averages.”

This new outlook regarding heightened hurricane intensity and landfall frequency will be incorporated in the RMS’s updated U.S. and Caribbean Hurricane Models. The models will also contain changes in the modeling of vulnerabilities and post-event loss amplification effects based on detailed RMS analysis of claims data from the 2004 and 2005 hurricane seasons. RMS will continue to monitor, publish, and apply the five-year forward-looking view of activity rates, in conjunction with convening an annual expert elicitation of leading hurricane climatologists.

“We are taking a clear, unambiguous position that our clients should manage their risks in a manner consistent with elevated levels of hurricane activity and severity,” stated Hemant Shah, president and CEO of RMS. “We live in a dynamic world, and there is now a critical mass of data and science that point to this being the prudent course of action.”

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