An $82 Billion Dollar Forecast
by CRAIG JAMES
I will readily admit I know next to nothing about how insurance companies estimate risk and establish rates, but I just have to share with you an article published on November 14, 2010 in a newspaper in Sarasota, Fla., about the insurance industry and hurricane risk prediction. The “prediction” was created in just four hours by four hurricane forecasters and turned out to be worth $82 billion to the insurance industry that had just suffered a $40 billion dollar loss due to Hurricane Katrina.
Apparently, on a Saturday in October 2005, a company called Risk Management Solutions (RMS) brought four handpicked scientists together in a hotel room in Bermuda. The scientists all believed global warming was causing an increase in the number and intensity of hurricanes. They, along with RMS, also shared a very disputed belief that computer models could accurately predict such a change. Instead of using 120 years of history to calculate the average number of storms each year, RMS used the scientists’ forecast as the basis for a new computer model that would estimate storms for the next five years.
This change in risk estimation “created an $82 billion gap between the money insurers had and what they needed, a hole they spent the next five years trying to fill with rate increases and policy cancellations.” RMS justified the change based upon what they called “scientific consensus.” True, it was a consensus, but among only four people who were highly biased.
Based upon four hours of what one of the forecasters called “winging it,” they estimated that the historical long-term average of 0.63 major hurricanes striking the U.S. every year would now be 0.90 due to global warming. That seems like a small change until you realize that it is a 45% increase in the risk of a catastrophe.
Plugged into a complex software program used to estimate hurricane losses, that number caused the reinsurance companies to triple their rates to the retail insurance companies. Since the Florida Insurance Commission would not let the retail insurance companies pass along rate hikes that high to homeowners, many insurance companies pulled out of the state, leaving an estimated 300,000 Floridians without insurance.
Today, two of the four scientists no longer support the forecast they made at the time. They now say the insurance “industry skipped the rigors of scientific method. It ignored contradictory evidence and dissent, and created penalties for those who did not do likewise.” Sounds exactly like what we skeptics have been saying about the global warming alarmists for years.
Another gathering of forecasters was organized by RMS in October 2008 to review its risk assessment. This time seven scientists were asked to “rank 39 different climate models that RMS would then run to produce a new five-year forecast.”
Dr. Judith Curry, whom I wrote about a couple of weeks ago, was one of the seven and was greatly concerned about the computer models. She said, “I thought all of the models were wrong. I didn’t have confidence in any of them.”
Another scientist in attendance, Roger Pielke Jr. (I actually went to school with his dad… boy, do I feel old) remarked
of RMS that “their methodology was biased and predetermined. A group of monkeys would have arrived at the exact same results.”
What were the new results? RMS lowered their forecast of a major hurricane striking the U.S. coast from 0.90 per year to 0.80. Which, by the way, did not immediately result in lower insurance premiums.
Oh, by the way, how did their forecasts turn out? For the initial five-year forecast period from 2006 to 2010, the RMS model called for at least 11 hurricanes (not just major storms) to come ashore in the United States, most of them aimed at Florida. Actually, just four hurricanes struck the United States. None hit Florida.
You can see from this chart the historical average of hurricane damage over a five-year period in billions of dollars for the United States, the amount of damage predicted by RMS, and the actual damage that occurred. It is another appalling example of where financial incentives all too often lie in human-induced global-warming theory and its supposed impacts. But the insurance industry recouped its losses, several times over, in fact. All based upon four biased forecasters who were “winging it.”
Craig James has been retired since July 1, 2008, after 40 years of broadcasting television weather. He was chief meteorologist at WZZM-TV for 12 years and chief meteorologist at WOOD-TV for 24 years. He is a graduate of Penn State University, where he received a Centennial Fellowship Award. He was also honored as a Fellow of the American Meteorological Society.