The Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) recently approved catastrophe modeling firm Risk Management Solutions’ new hurricane model. The FCHLPM, an independent body of experts, was created by the Legislature in 1995 to develop standards and review hurricane loss models used in the development of residential property insurance rates and the calculation of probable maximum loss levels. The “experts” include engineers, meteorologists, actuaries, insurance academicians and the insurance consumer advocate. They review hurricane loss models submitted by various modelers.
What are hurricane models and why are they so important? A hurricane model is a very complex computer program. The programs simulate and predict how, where and when hurricanes form, their wind speed, intensity and size etc., their track, how they are affected by the terrain along the track after landfall, how the winds interact with different types of structures, the damage they can cause to house roofs, windows, doors, interior, contents etc., how much it will cost to rebuild the damaged structures, and how much of the loss will be paid by insurers. The models are then purchased by insurers and used to determine the premiums charged by insurance companies for hurricane risk.
In this field, Florida is a national leader. The FCHLPM subjects all the models submitted by the various modelers to rigorous review before they are approved. The models MUST be approved by the FCHLPM before the Florida Office of Insurance Regulation will allow its use in a rate filing. Hardly any other state has such a process; most states simply accept models that are approved by the FCHLPM. During my time on this Commission, I was consistently impressed with the knowledge and competency of the FCHLPM. The complexity of these modeling programs can not be overstated. Unfortunately, few are aware of how the FCHLPM impacts how much Floridians pay for insurance.
The new model that was recently approved, according to reports, will increase reinsurance costs. These increased reinsurance costs are exactly the sort of costs that SB 408 allows insurance companies to charge an additional 15% for. Granted, this increase is linked to complicated hurricane models and offshore reinsurance companies; but it is still a rate increase. It has not even been a month, and consumers are already beginning to feel the negative effects of SB 408.