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Coastal homeowners may have less hurricane risk under new computer model

January 5, 2011

Mobile Press-Register - 02/06/11
By Jeff Amy

A new computer model for insurers predicts that inland homeowners face higher risks than previously believed, while coastal residents could actually face lower risks. The model by Risk Management Solutions will launch at month’s end amid continuing debate about the effect that modeling has on policy costs.

Many factors are considered when a company quotes a premium on a homeowners policy. But along the Gulf Coast, models showing large potential hurricane losses have a big influence on insurance costs, and even whether carriers are willing to write wind coverage.

“It has a significant impact on what people pay,” said Mississippi Insurance Commissioner Mike Chaney.

Risk Management Solutions, or RMS, is one of three major modeling firms that insurers use to predict how much money they could lose from a hurricane.

Claire Souch, vice president of natural catastrophe solutions at RMS, said that the Newark, Calif., firm has found that some storms, such as 2008’s Hurricane Ike, cause more damage inland than modelers expected.

A hurricane moving inland breaks down “more slowly in a number of situations than we had believed to be the case,” Souch said.

Many insurers blend or average the RMS model with the work of the other leading modeling firm, AIR Worldwide. Bob Groves of the Alabama Insurance Underwriting Association, the insurer of last resort for Alabama’s coastal area, said that AIR’s model already calls for heavier inland damage.

It will take a year or two for the insurance industry to digest RMS’ new outlook, Souch said. So it’s not clear how the model will ultimately affect the cost of coastal insurance.

Predictions of lower risk on the coast might lead insurers to lower rates, or lure more companies into the coastal market, according to insurers and regulators.

“The only relief (in the new model) is here on the coast,” said Ross Buchmueller, chief executive officer of Privilege Underwriters Reciprocal Exchange, a Florida-based company that recently began writing policies in Alabama coastal areas on homes worth more than $1 million.

But higher inland risk could have a different effect.

For example, it could boost the cost of reinsurance, which primary insurers buy to spread their risks. If reinsurance for inland areas becomes more expensive, insurers might increase overall rates or pull back even further from the Gulf of Mexico.

“It could help or hurt,” said Groves, who manages the Foley-based AIUA. “If they suddenly find themselves with a greater exposure than they thought they had in the upper part of the state, they may reduce their capacity in the southern part of the state.”

Montgomery-based Alfa Mutual Group, Alabama’s second largest homeowners insurer, is already trying to limit hurricane risk in some inland counties in the tier north of Mobile and Baldwin. Alfa spokesman Jeff Helms said that the company had imposed hurricane deductibles in some inland Alabama counties, but declined to say where, or how high the deductibles were.