AIR’s Severe Thunderstorm Model Key Component to New Peril-Based Fla. Homeowners Rates

April 29, 2004

For the first time, homeowners rates that include a severe thunderstorm component based on sophisticated catastrophe modeling have been included as part of a rating plan subject to approval by state regulators.

Florida Farm Bureau’s 2003 Homeowners rate filing included a ground-breaking actuarial approach, which develops a distinct base rate for both hurricane and severe thunderstorm perils using AIR’s Hurricane and Severe Thunderstorm Models. The models were also used extensively in the redefinition of territory lines and development of territory rating factors separately for each catastrophic peril.

“In the past, rates for severe thunderstorm losses were based on estimates of expected loss derived exclusively from historical data. But the localized effects of these storms and the sparse historical data for any given location, combined with the rapidly changing construction costs and demographics of the state, make reliance on data from past events less than ideal for ratemaking purposes,” said John Rollins, chief actuary at Florida Farm Bureau.

“Through the application of proven simulation techniques, the AIR model provides us with a high-resolution view of the risk,” he continued. “For years insurers have relied on catastrophe models for estimating losses from hurricanes and earthquakes, and Florida has set rigorous standards for their use in hurricane ratemaking via annual review by a panel of independent experts. With this successful filing, we have demonstrated the applicability of sophisticated modeling techniques in developing rates for severe thunderstorm risk, though this component of the model is not part of the Florida Modeling Commission’s review nor has it been explicitly approved by our regulator.”

Severe thunderstorms, which include tornadoes, hail storms and straight-line wind gusts, are reportedly having an increasingly negative impact on insurers’ bottom line. The May 2003 outbreak of severe storms cost insurers $3.2 billion, making it the most costly catastrophe loss of the year. Multi-billion dollar severe thunderstorm losses are no longer unusual.

According to ISO’s Property Claim Services (PCS), severe thunderstorm losses totaled $23 billion between 1998 and 2002. For the same period, losses from hurricanes and earthquakes together totaled $9.4 billion.

“The pioneering use of AIR’s severe thunderstorm model by Florida Farm Bureau to develop actuarially sound rates subject to regulatory review demonstrates that this peril should be modeled. More specifically, it demonstrates the value and credibility of the AIR model, which has been in use for more than 15 years,” said George Davis, actuarial consultant at AIR. “As losses from severe thunderstorms continue to mount, the need for more effective approaches to manage the risk will become increasingly apparent.”

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