Rates may climb for homeowners
January 31, 2011
Houston Chronicle - 03/01/11
By Purva Patel
An updated model many insurance companies use to measure the risk of hurricane damage could mean higher rates for those with property far from the coast.
Newark, Calif.-based Risk Management Solutions, which announced an update of its model this week, expects to see the wind risk for hurricane-prone states, including Texas, increase.
"Higher risk, real or perceived or invented, will lead to higher rates," said Robert Hunter, insurance director at the Washington-based Consumer Federation of America and a former Texas insurance commissioner.
The new model lets insurers more accurately measure the risk of losses resulting from wind damage, according to RMS.
In an analysis of properties nationwide, RMS found that potential losses due to wind damage increased 20 percent to 100 percent when run through the new model, though there were some cases of decreases.
The company used more than $18 billion of claims data from the past 20 years and engineering research to update the model, including research after Hurricane Ike that the company says provided new insights into Texas.
"Claims analysis from Hurricane Ike reveals that roofs were damaged at much lower wind speeds than expected, given the understanding of construction quality and building codes," Dr. Claire Souch of RMS said in a statement.
Ike also showed that damages can occur hundreds of miles inland at lower wind speeds, pummeling homes as far away as Ohio.
How they might react
What individual insurers choose to do — raise rates or cut them - could depend on what other models they use show and what the competition does.
Rather than increase rates, some insurers could decide to simply limit how much coverage they sell or stop renewing some policies to reduce their risk, said Ross Buchmueller, president and CEO of Privilege Underwriters Reciprocal Exchange, which sells coverage for luxury homes.
Companies that have been selling coverage in Texas for a long time will likely re-assess how much coverage they sell throughput the state, Buchmueller predicted. PURE entered the Texas market last year and insures about 500 homes here.
State Farm, the state's largest home insurer, said it is still evaluating what the model will mean for the company.
Hunter and other consumer advocates said that tweaks to models usually lead to higher rates.
"Without regulatory intervention, rates will rise because projected losses will increase because of a change in the models, not because of any actual change in risk of loss," said Birny Birnbaum, executive director of the
Center for Economic Justice, an Austin-based consumer advocacy group.
Insurers should use computer models to project rates, he said, but the models should be public, carried out by a public organization with no conflict of interest in the results, and subject to public oversight, he said.
"Without regulatory intervention, rates will rise because projected losses will increase because of a change in the models, not because of any actual change in risk of loss," said Birny Birnbaum, executive director of the Center for Economic Justice, an Austin-based consumer advocacy group.
Insurers should use computer models to project rates, he said, but the models should be public, carried out by a public organization with no conflict of interest in the results, and subject to public oversight, he said.
"Under the current system, Texas homeowners' insurance rates are hostage to an unaccountable computer program," he said.
Regulators' boundaries
While the state insurance regulators don't directly examine models, which are considered proprietary, regulators can ask an insurer for information about what goes into the model and what comes out of the model, such as the expected annual losses, said Jerry Hagins, a spokesman for the department.
The models are also peer-reviewed and certified by regulators in Florida, said Ryan Ogaard, senior vice president of RMS.
The company has also been corresponding with Texas regulators about setting up a meeting to explain the model, he said.
