Insurance Reform May Hinge on Computer Risk Models


Lots of ideas will be floated this week when politicians gather in Tallahassee to try to do something about the state's exploding property insurance rates.

Gov. Charlie Crist has several proposals, including a one-year rate freeze for customers of state-run Citizens Property Insurance.

'Big insurance has a new day coming,' Crist is saying, 'and it starts on the 16th.'

But whether all this talk will have an impact on your insurance bill may depend on the arcane science of insurance investigators and statisticians. That's because the rates that insurance companies set are derived from computer models of past storms, such as hurricanes.

Instead of using long-term models of the risk, some insurance companies now model the risks over five years. And since eight hurricanes have struck Florida in the past three years, that means rates are set to go through the roof.

HUNTER: A lot of the big increase you're seeing is because of this sort of overriding the long-term science with short-term guesses. And I find it highly objectionable.

That's Robert Hunter, a former Texas insurance commissioner now with the Consumer Federation of America. He says insurance industry pressure is the main reason why the computer models have changed.

HUNTER: They taken their 10,000-year projection, they brought in three or four 'experts,' they put them in a room and said, 'what do you really expect to happen in the next few years,' and they jack up the price, based upon that, fifty percent maybe in Florida.

A lot of his criticism is focused on California-based Risk Management Solutions. But Dr. Robert Muir-Wood, the company's chief research officer, says previously, they didn't have to specify the time frame used for the risk models.

Muir-Wood says before 2004's onslaught of storms, the idea was that hurricane activity was stable, and all you had to do to predict the future risk was to look back over the past hundred years or so.

But in the past 10 years, the number of hurricanes has increased by nearly a third over its historical average. And nine out of the past 12 years, the numbers of intense hurricanes has doubled.

MUIR-WOOD: We decided, in taking soundings of many people who are interested in risk, that actually we should be clearly indicating that we are talking about risk over the next five years. Not over the next 10 years, the next 20 years, not the next 50 years, but the next five years.

New Florida House Speaker Marco Rubio said last week that all four companies that provide such models to Florida insurers - including RMS - have agreed to his demand to release their hurricane computer modeling programs.

State Rep. David Rivera of South Florida is chairman of the House committee overseeing the investigation. He says a panel of experts will be convened to review the information sent by the risk management companies.

RIVERA: It is completely unprecedented. It has never happened before, precisely because the information is considered proprietary, so that they're industry trade secrets, so to speak. But the speaker was willing to go as far as necessary to make sure that the information used to calculate rates and premiums for the people of the state of Florida is based on sound science and data.

Hunter says that information will undoubtedly affect rates levied in coastal states threatened by hurricanes, from Maine to Texas.

HUNTER: If he finds some collusive and bad practices - which I suspect he will - I think the rest of the states will have to deal with it, in a very strong way. And Rivera says the expectations of the public to have real insurance reform means it's almost certain some kind of legislation will be passed.

And Rivera says the expectations of the public to have real insurance reform means it's almost certain some kind of legislation will be passed.

RIVERA: We're going to have consumer protection provisions in the bill, there will be real rate reduction in the bill, and there will be elements related to mitigation and enhancement of homes. There will certainly be something related to the Florida building code and certainly something related to Citizens Insurance. So I'm optimistic that there will be a legislative package passed and signed by the governor.

The special session is scheduled to last at least seven days.

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