1. 2000 CAS RATEMAKING SEMINAR
INCORPORATING CATASTROPHE MODELS IN PROPERTY RATEMAKING (PROP - 8)
BETH FITZGERALD, FCAS, MAAA

2. HURRICANE MODEL IN RATEMAKING
Why a Hurricane Model?
Hurricane Modeling
Use of Model Output in Homeowners Ratemaking
Revisions of Model
Future Plans

3. TRADITIONAL EXCESS PROCEDURE
Based on historical insurance experience
Split historical losses into normal vs. excess
Calculate expected excess losses
Use historical average
Use many years
Use regional data
As a percentage of normal losses
Replace actual catastrophe losses with long term average

4. LIMITATIONS OF TRADITIONAL PROCEDURE
Experience period too short
Changes in conditions
Difficulty in allocating to territory

5. GROWTH IN POPULATION DENSITY
PEOPLE PER SQUARE MILE

6. HURRICANES VS. TORNADOES
Tornadoes More Frequent
Tornadoes Individually Generate Lower Losses Than Intense Hurricanes

7. ADVANTAGES OF A HURRICANE MODEL
MODEL LINKS:
100+ years of meteorological data
damageability information by construction type
current distribution of insured exposure to risk

8. MODELING BASICS Simulate type & nature of hurricane
Estimate wind speeds from simulated hurricanes
Estimate the damage caused by those winds

9. HURRICANE MODEL For each simulated hurricane:
Establishes probability of occurrence
Establishes storm path
Determines wind speed at a site
Determines damageability ratios
Calculates expected damageability ratios by zip code for all simulated storms

10. REVIEW OF MODEL Comparison of modeled and actual frequencies
Compliance with standards of Florida Commission on Hurricane Loss Projection Methodology

11. MODEL OUTPUT Mean Damageability Ratios (MDR’s) by: zip code
building / contents / ALE coverage
construction type
single vs. multi-family homes

12. AGGREGATION OF ZIP MDR’s
NEED: Mapping of zip to ISO territory definitions
HAVE: Database with insured house values by zip and territory
TERRITORY MDR’s:
Calculate weighted average of MDR’s for individual zips comprising territory
For zip in multiple territories, allocate insured house values among territories

13. SAMPLE OF HURRICANE MODEL OUTPUT

14. SAMPLE CALCULATION OF WEIGHTED MDR

15. DEDUCTIBLE ADJUSTMENT
Model - percent deductible
Convert $250 to percent deductible
Model - adjusted MDR’s reflecting percent deductible

16. CALCULATION OF HURRICANE LOSSES
MDR’s by Construction Type within Territory
Hurricane Losses = MDR x Amount of Insurance by Construction Type
Territory Hurricane Losses = Sum over Construction Types
Statewide Hurricane Losses = Sum over Territories

17. REMOVAL OF HURRICANE LOSSES
Meteorological history
storm tracks, 6-hour wind speeds
Reported wind losses available
Manually remove hurricane losses

18. ADJUSTMENTS TO REPORTED LOSSES
For each of latest 5 Accident Years:
REMOVE REPORTED HURRICANE LOSSES
$250 Deductible
Excess (Non-Hurricane) Wind Procedure
LAE Factor
Current Cost/Amount Factor
Projection Factor
Base Class Level

19. STATEWIDE LOSS COST EXAMPLE

20. STATEWIDE LOSS COST EXAMPLE

21. CALCULATION OF HURRICANE LOSS COST
Statewide Hurricane Loss Costs from model
Apply Latest Year Current Cost/Amount Factor
Apply Projection Factor
Apply LAE Factor
Adjust to Base Class - Latest Year C & C Factor

22. STATEWIDE LOSS COST EXAMPLE Calculation of Hurricane Loss Cost

23. STATEWIDE LOSS COST EXAMPLE Indicated Loss Cost Change

24. TERRITORY LOSS COST CHANGES
Distribute statewide change to each territory
Compare combined non-modeled & modeled experience by territory to statewide experience
Adjust non-modeled loss cost to current year level

25. TERRITORY LOSS COST EXAMPLE

26. TERRITORY LOSS COST EXAMPLE
* Statewide Loss Cost Change = +9.3%

27. REVISIONS OF MODEL Impact on Pending Filings
Education on Detail of Revisions
Evaluation of Revised Output for Reasonableness

28. FUTURE PLANS
Territory Definitions
Separate Hurricane Rating

29. SEPARATE HURRICANE RATING
Current Homeowners Rating Procedure:
All-peril base loss cost by territory
Relativities - protection/construction, deductible, policy form, policy size

30. SEPARATE HURRICANE RATING REASONS
Traditional class relativities not related to hurricane peril:
protection, policy form
New class factors for hurricane peril:
type of roof, shutter protection, number of stories
Model allows for more refined territories

31. SEPARATE HURRICANE RATING
Difficulties:
Added complexity & major system changes
New class factors for hurricane peril may not be easily available

32. RESEARCH TO DATE Rating Factors for Hurricane Loss Cost:
Eliminate protection relativities
Use model construction relativities vs. all-peril relativities
Use same (all-peril) policy size relativities
Investigate secondary building characteristics available from model

33. SEPARATE HURRICANE RATING
Only consider in high hurricane prone areas - Southeast states & coastal areas
Need to redefine territories in some states to be consistent with hurricane exposure
concurrent with territory review of state