Industry’s new risk models draw sharp criticism

Insurers say models based on five years? data better reflect current storm patterns. Above, a grassy field is flooded along Hundred Acre Cove in Barrington. /
Insurers say models based on five years? data better reflect current storm patterns. Above, a grassy field is flooded along Hundred Acre Cove in Barrington. /

Rhode Island lawmakers are scrambling to address skyrocketing home insurance rates and the increasing number of homeowners who are losing their insurance entirely, as insurers adopt new risk models that predict drastically increased risks associated with climate change.
Having been rocked by unprecedented insurance costs in the Gulf Coast after Hurricane Katrina, many insurance companies are re-examining the risk that a hurricane of similar intensity could hit New England, and the costs associated with such a storm.
As a result, insurers are identifying many more Rhode Island properties than ever before as a significant risk. Not surprisingly, those most affected live in coastal communities, where insurance premiums have typically doubled or tripled in recent years and insurers have pulled coverage for thousands of homes, said Rep. Paul W. Crowley, D-Newport.
But because Rhode Island is so small, homeowners in every part of the state are being affected – even people who live several miles from the shore are experiencing double-digit premium hikes, deductibles of $20,000 or more, or demands that they buy flood insurance or make structural changes to their homes that can cost thousands of dollars, he said.
“Hardly a day goes by that I don’t get either a letter or a phone call from someone else,” said Crowley, who is losing his own home insurance in June and expects a new policy with double the premium. “People are paying, probably when you start to multiply this out, tens of millions of dollars in increased premiums and costs.”
Crowley and consumer advocacy groups say they are particularly concerned about new computer models being used by the insurance industry that find a greater likelihood that major hurricanes will strike New England in coming years than some scientists agree with.
In particular, Risk Management Solutions – one of the major modeling companies used by the insurance industry – has come under fire for adopting a computer model that predicts the likelihood of hurricanes based on hurricane activity in the previous five years. In the past, insurers have assessed hurricane risk for a region based on storm data reaching back more than 100 years.
Consumer advocates say RMS’ new computer model uses questionable science to give insurers a justification for raising insurance rates.
“The science of this short-term projection is falling apart,” said J. Robert Hunter, director of insurance at the Consumer Federation of America. “Other scientists are saying the whole methodology is not scientific, the whole idea of using these short-term projections is impossible.”
Consumer advocates are urging state regulators to deny insurers’ rate hike requests when they are based on RMS data or similar risk models, but Rhode Island has not yet challenged insurers’ use of the computer models, Crowley said.
A study commission formed by the R.I. House of Representatives in March to investigate rising home insurance costs in the state is scheduled to conduct a hearing on Wednesday.
Crowley, who heads the panel, said he plans to press officials from the R.I. Department of Business Regulation to make any insurer seeking rate increases based on “new science” to present its scientific findings to the DBR for review by a third party.
A. Michael Marques, director of the DBR, said he would work with state legislators to come up with solutions to the problem of rising homeowner insurance, and that his office also has ideas it will present at Wednesday’s hearing.
But Marques cautioned against a knee-jerk reaction to rising home insurance rates, describing it as a complex problem in many ways beyond the control of the insurers.
The insurance payout following Hurricane Katrina – which approached $100 billion – cost far more than models suggested they would for such a storm and forced the insurance industry to re-examine concentrations of risk in other regions, he said.
As a result, reinsurance companies and rating agencies, which are themselves using the new computer models, are requiring insurers in New England to reconsider the amount of risk they are carrying and raise their rates or drop high-risk policies, Marques said.
As an example, rating agencies such as Standard & Poor’s are threatening to lower their ratings on home insurers in New England that don’t have the financial ability to withstand two very large Category 3 hurricanes in a single season, which has never happened in modern history, Marques said. Such a rating reduction could easily put a smaller insurance company out of business, he said.
As it happens, Rhode Island is a very high-risk market for home insurance, and a significant portion of the market is held by small, local mutual companies. They have been forced to drop many policies to sufficiently spread their risk and maintain their credit ratings, Marques said.
Home insurance costs also have been driven up by property values on the coast that exploded during the housing market boom that ended last year, he said.
“Five years ago, a house that may have been worth $100,000 is now worth $400,000. All of a sudden your exposure is now $300,000 more, and you haven’t done a thing as an insurance company,” Marques said. “If you’ve got a concentration in an area, that exposure could have doubled or tripled, especially coastal properties, in the last five years, which means you now have to remove yourself. It’s too high a risk to take a hit.”
While solutions need to be found that protect Rhode Island homeowners from continued insurance increases, the state needs to handle the problem in a way that enables the state’s insurers to continue doing business here, Marques said.
“The lawmakers are saying, ‘Well, their science is not good.’ I don’t know how you deal with that,” he said. “If we come out and say we have another model that says that’s inaccurate and ours is good, nobody will use it. If we tell them, ‘You can’t use the modelers that are accepted by all the other insurance companies,’ they’re not going to write in the state.”
Florida experienced just that result when it froze insurance rates for 90 days, Marques said – Allstate, one of the largest home insurers in the nation, stopped writing policies in the state.
Ultimately, a concentrated market will hurt consumers, he said.
“If you force insurance companies to leave this state, the consumer is going to get hurt,” Marques said. “If we go from 25 or 30 writers of property and casualty down to five, I will guarantee you that the cost of those policies will go up.”
Some consumer advocates point to record profits earned by insurers in recent years as evidence that the industry is using climate change as an excuse to gouge consumers.
“In 2004, 2005 there was a lot of [hurricane] activity, and by the way, in both 2004 and 2005 the insurance industry set record profits,” said Hunter, of the Consumer Federation of America. “Last year, they set obscenely high record profits. Even in years of extreme damage they have mastered the art of being able to not pay out as much and continue to earn good incomes.”
But Marques disagreed that insurers – particularly smaller mutual companies that hold a significant slice of the Rhode Island market – are trying to overcharge their customers.
“Yes, they’re making a lot of money,” he said. “One hurricane would change that immediately.”

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