The newest catastrophe models from Risk Management Solutions Inc., based on increased storm frequency, should result in premium hikes of 40-to-50 percent, an RMS executive said.
That advice came from John Kapitan, RMS consulting vice president, during a conference call yesterday.
He said the model changes to be released May 19 should also result in commercial vulnerability curves of about 30 percent and include loss amplification factors such as building supply demand surge and claims handling costs that will be given greater emphasis.
And while personal vulnerability curves will increase, the shifts will not be as dramatic as they will be for personal lines, Mr. Kapitan said.
Mr. Kapitan also noted that given concerns that companies could game model outputs when developing probable maximum loss figures they show to rating agencies or use for pricing, RMS generally offers little leeway for clients to manipulate model outputs.
For hurricanes, such discretion is limited to turning on and off various "switches" that include storm surge, demand surge and secondary uncertainty, which acknowledges that things may not happen as predicted.
Bank of America securities analyst Brian Meredith said that the activity rate changes in the model should not be a surprise to RMS clients.
He said many have already made some adjustments to reflect increased storm frequency.
Mr. Meredith added that the insurance industry reaction to the 2005 storm season has been to put a new focus on improving data quality.
In addition, he found, there is greater awareness that not everything can be modeled, such as specific perils or the added effects of certain named perils such as contamination following flooding. "There are therefore requirements for greater qualitative consideration to be given to these nonmodeled risks," he advised.
A new emphasis by rating agencies on catastrophe risks has resulted in increased capital requirements and requests for scenario analysis and stress tests from companies, Mr. Meredith added.
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