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Meeting the challenges of the RMS Version 11 U.S. windstorm model

Meeting the challenges of the RMS Version 11 U.S. windstorm model

Sherry Thomas heads Guy Carpenter & Co. L.L.C.’s catastrophe management team for the Americas. She recently discussed the continuing impact of Risk Management Solutions Version 11 model for U.S. windstorms with Business Insurance Senior Editor Mark A. Hofmann.

Q: What is RMS Version 11 for U.S. windstorms?

Risk Management Solutions’ Version 11 windstorm model is a detailed loss estimation model capable of utilizing specific structure and coverage data for most insured risks, ranging from homeowners risks to industrial facilities. Potential losses from windstorm events (both historical and possibilities that have not occurred) can be calculated for an insurance portfolio as a whole or for specific policies and even individual risk locations.

Q: How does it differ from previous versions?

Differences in Version 11’s results are still emerging as users test and evaluate the model. Major revisions include:

• Inland filling rate changes include the effect of wind losses being driven much further inland than previously simulated, which was a weakness in prior versions;

• New storm surge model with revised hazard and take-up rate assumptions for the National Flood Insurance Program but with limited ability for insurers to account for existence of such coverage or reduced limit coverage for the peril;

• Adjustment of the stochastic as well as historical hurricane frequency rates by region and storm category;

• Increased vulnerabilities at lower wind speeds;

• Increased vulnerabilities of commercial risks;

• Decreased impact of secondary risk modifiers such as storm shutters and roof coverings; and

• Updated regional building practice considerations such as building code enforcement and workmanship quality.

Q: What practical impact is the new version having on insurers and reinsurers?

This version could change insurers’ perspectives about their catastrophe risk potential and create interest in adjusting underwriting practices or re-evaluating capital and reinsurance protection. It may also change the attractiveness or even sustainability of current business or new business being contemplated. However, most insurers recognize that catastrophe models are far from infallible, even as they face constraints from regulatory agencies and reinsurance capital providers that heavily utilize models in evaluating insurance companies.

Q: What can insurers do to meet any new challenges presented by the model?

Insurers should question, evaluate and validate model results independently or with a trusted party. They should question each facet of a model, including the hazard, structure vulnerability and calculated financial result, and then test those parameters against their experience and coverage practices. Rather than letting a single model dictate their views of catastrophe risk, insurance companies should utilize a variety of experts—including more than one model—to establish their views of the likelihood of loss thresholds, potential events that would be critical to their businesses, and from what geographies and perils losses could be sustained.