LONDON (Reuters) - Florida regulators have approved a new hurricane risk model which is likely to drive reinsurance costs for insurance companies higher, in contrast to previous industry expectations that it would have little impact.
The software revisions by risk assessor Risk Management Solutions have increased the majority of insured loss estimations by up to an average of 30 percent across the United States for property and casualty insurers.
But brokers and reinsurers were expecting the new loss estimations for Florida -- traditionally hit more regularly by hurricanes than other states -- to remain similar to the previous model.
RMS said on Thursday it expected estimated losses in Florida to increase by up to 6.5 percent.
“Everyone expected Florida to remain flat, but the estimations have shot up as well,” said one Bermudian-based reinsurer. “I don’t know if Floridian companies have the budget to pay for this increased risk perspective.”
The Florida Commission on Hurricane Loss Projection Methodology said the software revisions from RMS can now be used in residential rate filings with the Florida Office of Insurance Regulation.
The model changes have increased loss estimates for the amount of damage an Atlantic hurricane can cause for inland states increase significantly by up to 90 percent.
The updated model reveals new information about how hurricane risk is spread across Florida, with decreases in the view of risk to some coastal areas and increases in the view of risk to Central Florida compared to the previous model version, RMS said in a statement.
While wind risk in some coastal locations, such as Miami-Dade, is lower than had previously been understood, the risk in Central Florida has increased, due to advances in RMS’ “understanding of how hurricanes decay over land.”
The reinsurance market has reacted with uncertainty to the new Version 11.0 model from RMS. Credit rating agency Standard & Poor’s put 16 catastrophe bonds on negative credit watch in April, stating that the changes in the model were significant enough to prompt a review.
Analysts say that the model changes could give insurers a strong incentive to raise prices.
Reinsurers that write hurricane risk for Florida has increased since Florida’s insurance watchdog cut the collateral requirements for offshore companies. Hannover R and Bermuda-based reinsurer XL Re Ltd now write property catastrophe business, along Munich Re and Swiss Re.
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