As Florida’s annual hurricane deductible law goes into effect on May 1 for the state’s residential policyholders, Risk Management Solutions (RMS), a provider of products and services for the management of catastrophe risk, released the results of an analysis exploring the insurance industry impact of using the new deductible instead of a single event hurricane deductible.
Based on its analysis, RMS has found that the estimated average annualized loss that insurers are exposed to under the new policy terms increases by less than 3% for deductibles common to Florida homes.
Under the Florida law, which takes effect Sunday for new and renewing personal lines policies, residential policyholders now have an annual hurricane deductible covering losses from all hurricanes in a calendar year.
Once the deductible is met, losses from additional hurricanes in the same year are subject to the policy’s “other perils” deductible, which is typically lower than the hurricane deductible. To quantify the impact of this policy change, RMS reviewed the historical record to determine the long-term potential for multiple damaging hurricanes to impact the state in one season, a phenomenon called hurricane clustering.
“When clustering occurs, it is possible for one home to be hit by more
than one hurricane, as was the case for some properties last season. In this case, a seasonal deductible will result in higher insurance claims relative to a single-event deductible,” said Kyle Beatty, meteorologist at RMS. “However, our simulation of over 1 million years of hurricane activity shows that this is extremely rare. The majority of risk is driven by years when a location is impacted by only one storm.”
The impact of the new legislation on hurricane insurance risk varies basedon the size of the deductible in force and the location of the property. The impact is greatest in areas of high hurricane frequency, such as Southeast Florida, and for policies with high deductibles. Commercial and multi-location policies with blanket deductibles would experience different effects, and are not addressed under the new legislation.
The analysis of seasonal deductibles is part of a comprehensive research initiative RMS launched in November 2004 to analyze the unprecedented level of data generated by the 2004 Atlantic Hurricane Season.
The program includes research into hurricane frequency and an extensive analysis of industry claims data.
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