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Member, Beacon International Group, Ltd.
TO THE EDITOR: In the property insurance world, there has been much discussion in 2011 regarding the number of losses in the first half of the year and, equally, the release of the new RMS 11.0 CAT Model.
Since the release of the new model, loss estimates have increased dramatically, in some cases more than 100%. The model has been the subject of much debate and has caused many to reconsider the potential exposure at risk. For example, insurers are faced with charging more for the exposure or reducing the amount of exposure. Meanwhile, insureds are concerned about buying ample limits for this exposure and the cost for this capacity.
I do not wish to debate the accuracy or legitimacy of the new model, but I would like to suggest a shift in the industry's collective approach and method by which it measures catastrophe exposures going forward.
We all know that modeling natural catastrophe exposures is not an exact science, there are many variables to contend with, and each loss has its unique characteristics, which always seem to produce new risk factors to analyze.
In the past several months, I've had many conversations with the lead executives on the property side of most of the large insurers that provide this much-needed cat capacity. Insurers believe they are not in a position to agree or disagree with the new model, because their hands are tied due to the rating agencies' requirement to measure the exposure based on the RMS model.
There are two other credible models that the industry uses to measure this exposure: one provided by AIR Worldwide Corp. and the other by EQECAT Inc. What I propose is that the industry—insurers and the rating agencies—consider utilizing an average of the three models, as opposed to relying exclusively on one model. A blended approach would alleviate the pricing and capacity concerns of both insurers and insureds.
David J. Finnis
Executive vp, national property practice leader
Willis Group Holdings P.L.C.
Atlanta