November 24 2010

Words on Weather & Climate

November 24, 2010 // 0 Comments

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 […]

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