Insurance Transparency Project

I-Fans,I kid around a lot, but do not miss the Tampa Tribune series by reporter Kevin Begos et al on Risk Management Solutions, the closely held Newark, Calif., consultant whose scientific models for predicting hurricanes are used by 400 insurers, including State Farm, Lloyds of London and, for the moment, the state-owned Florida Citizens Property Corp. The
Tampa series (published in January and afterward) is on ITP’s Key Katrina/Insurance Documents. Look for “Tampa.”

A year ago, RMS announced a dramatic change to the hurricane-modeling software it sells to the industry, abandoning a formula developed after Hurricane Andrew in 1992 that uses 100 years of storm data, in favor of a “medium-term” five-year model that abruptly predicted hurricane losses would rise 40 percent on the Gulf and 25 to 30 percent in other regions. Based on those models, insurance prices would have to rise accordingly.

Trouble is, the new model is based on a consensus of experts who are now disavowing RMS’s conclusions and the use of their input.

“The leading computer model used by the insurance industry to justify huge rate increases in coastal areas nationwide relies on faulty science, says an expert credited with helping develop it.

‘I think it points to a problem with the way these modeling groups are operating,‘ said Jim Elsner, a professor of geography at Florida State University.”

A NOAA scientist and another RMS panelist says the same thing

“Thomas R. Knutson, a research meteorologist with the National Oceanic and Atmospheric Administration in Princeton, N.J., and another RMS expert panelist, said the five-year timeline didn’t come from the experts.

‘I think that question was driven more by the needs of the insurance industry as opposed to the science,’ he said.”

RMS’s March 2006 press release announcing the change said the five-year model was developed in cooperation with the expert panel that included Elsner and Knutson, and that based on their perspective: “Increases in hurricane frequency should be expected along the entire U.S. coast, but will be highest in the Gulf, Florida, and the Southeast, while lower in the Mid-Atlantic and the Northeast.”
” ‘I didn’t make any such statement of that type,’ Knutson said Friday.”

And:

“Elsner said he warned RMS about flaws in the model. ‘I said that’s not a good way of doing it,’ he recalled, and said RMS exaggerated the basic science ‘well beyond what we expected.’ “
Plus:

“Though RMS said in March that the expert panel ‘agreed unanimously that a forward-looking view of risk should reflect a higher probability of landfalling hurricanes,’ Elsner said there was no consensus.”

RMS spokeswoman Shannon McKay says Elsner was not part of a second panel of experts convened later in 2006.
” ‘All of these folks were well aware of what we were ultimately going to do with the data,’ she said. The experts were paid for travel expenses for the discussion in Bermuda but received no other compensation.”

In a letter to the editor, Robert Muir-Wood, RMS’s chief research officer (and yes, that’s his name) said he was “stunned by the inaccuracies and one-sidedness” of the Tribune story.

” ‘ All four scientists, including Professor Jim Elsner, gave their sign-off on the outcome of this process. RMS then took the results of this forecast and implemented them in its hurricane catastrophe model.’ “(1)

He added the Elsner declined to attend the second conference, saying that he was “under contact with a company affiliated with our main competitor,” and that the second panel went into “greater depth than the first meeting.” Read it on Key Documents.

But remember, the criticism of RMS’s methods is coming from RMS’s own panel. Outside scientists have even more to say, particularly about RMS’s statement that its methods “are in the process of being published” by Tellus, a peer-reviewed journal of the Swedish Geophysical Society.

First, it “doesn’t count” until it’s published, according to Sarah Rockwell, director of scientific research at the Yale Medical School.

And, it’s wrong to apply science before publication, the Trib quotes a modeling specialist, Charles Watson.

” ‘You publish; then you apply it,’ Watson said. ‘Especially for something with trillions of dollars in property value, and people’s lives and livelihood are literally at stake in these decisions. It is irresponsible to implement before peer review. There are tremendous policy implications.’ “

There’s more, but War Eagle is concerned that such an important group of people spending so much time reading Insurance Notes!(TM) will cause U.S. productivity to slip.

Suffice it to say that RMS’s main competitor, AIR (Applied Insurance Research) Worldwide Corp., Oakville, Ont., is off the reservation.

“We continue to believe, given the current state of the science, that the standard model based on over 100 years of historical data and 20 years of research and development remains the most credible model,” writes David A. LaLonde, AIR’s senior vice president, in the latest issue of Contingencies, the American Academy of Actuaries answer to US Weekly. AIR is a unit of ISO, which, ah, the heck with it. Look it up on ITP.

And, also on Key Documents, is a letter to the National Association of Insurance Commissioners (sigh, we’ll get to them later) by the Consumer Federation’s Bob Hunter and the Center for Economic Justice’s Birny Birnbaum that says RMS reneged on a promise to use long-term models after the big price hikes that followed Andrew. The two advocates use the old were-you-lying-then-or-are-you-lying-now device:

“One might ask, given the fact that RMS initially developed its model in the wake of Hurricane Andrew, why its prior projections were so far off the mark? Did insurers and modelers not know what they were doing then? Do they not know what they are doing now? If we assume the best — that the insurers and modelers were incompetent — there is clearly a need for regulatory oversight to improve the quality of the decision-making. If we assume the worst — that the changes are driven by politics and not science — the same need for regulatory oversight exists.”

It’s all up on Key Documents.

(1) A big problem here is that RMS considers its hurricane CAT model a trade secret, so it is not subject to scientific review.
Thanks to Hunter, King of Hungarian Folk Dance and Amy Bach, and Stout-Heart-Princess-of-Ward-8, for pointing out flaws in ITP’s links.