The model is currently under review by the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) to determine its compliance with their published standards, and ultimately to determine if the model can be used in rate filings in Florida.   Other coastal states’ regulators often make their decisions on the use of new models in their state based on what happens in Florida.  Louisiana has their own evaluation methodology, but most other states do not perform an independent, in-depth review of the models used in rate filings.

As the new model is being reviewed by insurance regulators, actuaries, and others, it is important to ask a few questions about the model:

• Will the FCHLPM accept the model?  If not, how does that affect how other state regulators will address use of the model?
• How long will it take for companies, brokers and reinsurers to get it installed and tested?
• How will reinsurers use the model? Will there be multiple versions such as long-term/ short-term?
• Will reinsurers and direct writers use the RMS model only in their ratemaking, or multiple models, or maybe not use RMS at all?
• What will the final impact be on inland policy premiums, given that the portion of the total premium attributable to hurricanes in these areas is relatively low?
• How will regulators and companies phase in the impacts of the new model into filed rates?
• How will regulators and companies communicate the reasons for rate increases? (model changes, doubling of non-cat losses in the past 3 years, impact of competition, etc.)

Looking ahead, if the model is accepted for use in Florida by the FCHLPM, it may be modified from the current released version.    These modifications should not affect reinsurance pricing because the Commission’s actions don’t affect the reinsurers directly.  However, for insurance companies, it might be late summer before model runs can be prepared for inclusion in rate filings, since it takes time to get the release out, installed and tested.  Current law only allows 60 days from the date a new version of a model is accepted to use the prior version in rate filings in Florida.    

On top of all this, there will be significant changes in the Florida statutes regarding property insurance by the end of the session in early May.  Assuming the Governor signs the legislation, there will be a period of time to figure out how the Office of Insurance Regulation is going to actually implement the changes.  This is always hard to predict, as their actuaries and management often come up with implementation requirements that are difficult for insurance companies to evaluate and implement.

What do you think?  Will the new model be accepted by the FCHLPM? Will the new RMS model have a significant impact on Florida insurance premiums?  What will nearby states do? Let us know your thoughts.

However, it should be noted that homeowner insurance premiums are comprised of two components: Hurricane premium and Non-Hurricane premium.  Many of the inland areas for which the new model is predicting an increase in hurricane risk have premiums which include a larger Non-Hurricane component than Hurricane component.  The increase in hurricane risk resulting from the new model does not necessarily indicate that inland areas such as Ocala and Orlando will see a significant impact on overall premiums as predicted by the article.

There are additional factors that have to be considered relative to the new RMS model:

• The new version of the model has not yet been accepted for use in Florida by the Florida Commission on Hurricane Loss Projection Methodology, a requirement that must be met before any insurance company can use in the model to modify rates in Florida;
• Not all insurance companies that write property insurance in Florida use the RMS model to develop their rates; in fact there are four other models that have been accepted for use in Florida over the past few years; and,
• There are many other factors that affect the rates charged by insurance companies in inland areas such as competition, changes in expense provisions, and changes in non-hurricane loss trends such as sinkhole, fire, crime and water damage.

What do you think?  Will the new RMS model have a significant impact on Florida homeowners insurance premiums?  Is the impact on rates for inland areas of the state accurately described in the article?  Are there other factors that have as much or more impact on inland Florida property insurance premiums?

Peter spoke about risk premium and the impact of mitigation on premiums. He illustrated the impact by using an example of non-mitigated homes compared to mitigated homes, saying that mitigation credits are not factored adequately in the reinsurance costs. As a result, non-mitigated homes are often bad economic risks.

Click here to read Peter’s presentation.