Hurricanes are not the only Catastrophes. Today is Pearl Harbor Day. Remember Pearl Harbor and remember, too, that everyone's life is entitled to respect if only because all our lives, already too short, are every one subject to unexpected Catastrophes and losses.
The role that computer models play in current Insurance Premium Rate Requests is again being looked at. This is a recurring, if sporadic, occurrence. See, for example, the post here on June 29, 2011, "More Computer Models Print Out In Put: This Time, Coverage?"
The Massachusetts Attorney General's Office sent a letter to the Massachusetts insurance rating bureau on November 17, 2011. In it, the A.G. pointed out her position that "faulty computer-generated hurricane models have contributed to unnecessarily high home insurance rates for property owners across [Massachusetts]." Mark Alan Lovewell, "A.G. Faults Hurricane Models For Inflating Homeowner Insurance Rates" (Vineyard Gazette, published online on Friday, December 2, 2011).
Although the A.G.'s letter itself does not seem to be on the A.G.'s website, a Press Release dated November 17, 2011 is accessible there. In it, the Massachusetts Attorney General makes clear both that transparency does not exist in making these computer models, and that accumulated actual evidence is ignored in the input into these models. These are real problems for homeowners who must pay higher Premiums:
Most Massachusetts insurers use private prediction models to estimate expected hurricane losses when rating and underwriting a policy. AG Coakley noted in her letter that the insurers are not appropriately detailing how the companies are using these models, and no regulatory body has reviewed most of these models to ensure that they are suitable for use in Massachusetts. Not only are models not being reviewed, the Commissioner is allowing the use of models that have been rejected in other states, such as Florida. Historically, these rejected models have inflated expected losses well above actual experience.
Massachusetts Attorney General's Press Release of November 17, 2011 concerning her letter to the Commissioner of the Massachusetts Insurance Rating Bureau, entitled "AG Coakley Urges Hearing on Excessive Homeowner Insurance Rates / Estimates Possible Overcharges of Half a Billion Dollars Due to Untested Hurricane Models". Both of these points are made in the linked Vineyard newspaper report as well. Parenthetically, so-called 'information asymmetry' or unbalanced access to information used in the writing of Insurance and in the handling of Insurance Claims is also a frequent subject of current commentary. See, e.g., "Asymmetrical Information Overload" posted on Insurance Claims and Bad Faith Law Blog on November 22, 2011.
It is reasonable to expect an even greater increase in the use of allegedly faulty computer-generated models of catastrophe risk, along with the leverage that comes from information asymmetry. Through the first nine months of 2011, Property and Casualty Insurance Companies in the United States experienced "catastrophe-related losses" that doubled all of the catastrophe claim payouts of 2010, or $38,600,000,000.00 ($38.6 Billion) in the first nine months of this year. See "U.S. P/C Insurers' Catastrophe Losses Top $38 Billion" (Insurance Journal, published online on Monday, December 5, 2011).
The author of this post is also Co-Author of "CATClaims: Insurance Coverage For Natural And Man-Made Disasters" (Thomson Reuters West).
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