Florida Hurricane Risk Management Assessment

June marks the beginning of the hurricane season so a new study just released that predicts widespread damage in Florida's interior counties is causing a storm of reaction within the insurance industry. Property/ Casualty insurance companies traditionally have used the study to determine homeowner premiums.

The study by Risk Management Solutions,The Tampa Tribune reported, "has the insurance industry abuzz with speculation about how the findings' ripples will affect insurance rates for homeowners".

The Risk Management Solutions model – suggests that the state's interior spine, which has insulated from the raw destruction of hurricanes, may be more vulnerable to serious damage than previously assumed. This data has been collected since 2004 when a stream of hurricanes climbed up the state from south to north.

The model also has been validated against industry loss reconstructions for more than 20 hurricanes that made landfall and caused some $180 billion in losses since 1985.

The 422-page hurricane damage study recently was accepted by the state as one of a handful of models that insurance companies rely on to set rates. The news was not all bad, however. The study also concluded that wind damage along the coast may be less than expected because the buildings there are built better.

One reason why they are built better is presumably because they have been recently rebuilt due to hurricane damage suffered in those hurricanes that have occurred on the Florida coasts int he recent past.

Because insurers use this model to adjust rates, its possible that insurers will increase insurance poremiums for thos homeowners in Florida's interior communities. Jim Massie, spokesman for the industry trade group Reinsurance Association of America reacted by saying, "The models are just tools for companies to use in trying to assess their hurricane risk." Insurance rates could go up in interior parts of the state, he speculated, and they could go down along the coast, if companies incorporate the Risk Management Solutions model.

Massie also noted that such changes in rates must be approved by the state's Office of Insurance Regulation, he said. The requests for rate changes are either approved, approved with modifications or rejected, he said.

Risk Management Solutions of New Jersey compiled the actuarial report and submitted it to the Florida Commission on Hurricane Loss Projection Methodology, which approved it in May as one of the five risk-management models used by insurers in setting rates.

In addition to using the model to set premium rates, the model also is used by insurers doing business in Florida in deciding whether or not to continue coverage in certain areas of the state, said Jack Nicholson, chief operating officer for Florida Hurricane Catastrophe Fund.

Insurers do not take lightly the decision to withdraw from insurance markets. When State Farm withdrwew in 2009 fromm the Florida property insurance market they said it was not due to hurricanes, but obviously it was a factor and was reported by the St. Petersburg Times.

The realization that hurricanes can cause extensive damage to the interior of the state was realized seven years ago when a handful of storms marched up the peninsula, he said, devastating inland communities previously thought relatively safe from hurricanes.

Coastal properties still can be damaged by storm surge, he said, but buildings along the shore nowadays have been rebuilt to withstand hurricane force winds, so the risk of widespread wind damage along the coast is less than in previous years.

Hurricane season began on June 1 and the National Oceanic and Atmospheric Administration has predicted between 12 and 18 tropical storms this summer, with six to 10 becoming hurricanes. Of those, NOAA expects three to six to grow into Category 3 or stronger.

Hurricanes have not provided a direct hit on the state of Florida since Wilma in 2005, and it's not easy coming up with risk assessments in the meantime, according to one of the other models, submitted by AIR Worldwide Corp. In other words, Florida is overdue.
"Property values change, along with the costs of repair and replacement," the report said. "Building materials and designs change and new structures may be more or less vulnerable to catastrophe events than were the old ones. New properties continue to be built in areas of high hazard." Ryan Ogaard, Risk Management's senior vice president, said models are fine-tuned every two years. They have to be, with constant advances in technology and data collection, he said, as well as adjustments with data from new storms incorporated.