BY ANN HENSON

Citizen Staff

            A former state insurance commissioner says wind insurers nationwide pressured companies that produce computer-simulated models, upon which they base their rates, to change their formulas so the insurers could charge higher rates.

            Risk Management Solutions, or RMS, is a prime example of what goes on.  The company recently reduced the historical data it uses from 10,000 years of weather forecasts to a decade or less. 

            Citizens Key West Home Insurance Corp. is among the insurers that get their models from RMS.

            Bob Hunter, Texas ’ insurance commissioner in the mid-1990’s, said insurers back then requested states scrap the way they assessed insurance risks in favor of computer-simulated models based on 10,000 years of weather.

            “They considered all kinds of potential from huge Category 5 storms hitting Miami-Dade County to years of no activity,” Hunter said.

            Insurers said rates would increase at first, then stabilize to a point where they wouldn’t increase during years of high storm activity, but they wouldn’t decrease when there was a lull.  Instead, the surplus from the good years would bankroll bad years’ claims.

            Hunter and other insurance commissioners, including Florida ’s, approved using the new models from the ‘90s, he said.

            “We all wanted stability,” Hunter said.  “But now they’ve come back and said they found out there are periods of lots of storms and they have to raise the rates.”

            Hunter is fighting wind insurance increases not only for Texas but for all of the Atlantic coastline, where the modeling companies’ formulas will allow insurance companies to increase rates dramatically.  He believes the modeling companies should be regulated, and is urging state insurance regulators to conduct a full investigation and public hearings for the companies to explain themselves.  If the regulators do not have the authority, he recommends they obtain it, so they can oversee the modeling companies.

            Florida has taken a first step in monitoring modeling companies by developing a public model and requiring insurance companies to show their calculations if they use private models. 

            In October, the California-based RMS, which produces computer models for a variety of perils, solicited a panel of scientists to look at future hurricane activity.  The experts already were in Bermuda for a h8urricane conference, so RMS asked them to stay one more day to talk.

            One of those scientists was Jim Elsner, a Florida State University Department of Geography professor.  Elsner said he’s been involved in insurance modeling since the 1990’s.

            “There may be some climate-change issues that are changing hurricane activity,” he said.  “To hedge against that, one may want to think that the next five to 10 years may be more active than in the previous, more active years.”

            Elsner said evidence exists that a recent increase in hurricanes may become the norm, rather than the previous pattern of increased activity followed by decreased activity.

            “But that may not be the majority opinion, it represents a possibility and people should be aware of that,” he said.  Scientists at the National Oceanic and Atmospheric Administration, or NOAA, and Colorado State University ’s hurricane expert Bill gray do not believe climate changes will affect hurricanes, Elsner said.

            NOAA will say only that the increase in intensity and number of storms began in 1995 and can span multiple decades.

            Elsner said RMS compensated the scientists – though he would not say how – and framed their discussion, telling them “they wanted the discussion based on five years.  The decision to change from a long-term perspective to short-term was theirs,” he said.

            Now, he thinks he might have been used.

            In March, RMS issued a report and press release saying increased hurricane activity prompted it to change its models to show losses increasing by 40 percent across the Gulf Coast, Florida and the Southwest for the next five years, instead of models based on long-term historical data.  The company said it based its decision on “a panel of leading experts in hurricane climatology convened by RMS in October 2005.”

            “I’m not sure this is a basis for changing your rates, with a scientific discussion,” Elsner said.  “That’s where I have a problem with what they did.”

            He also feels that the company “used what we did to get an advantage somewhere in the marketing and modeling industry.  Using our manes now and not compensating us might border on something [unethical], but I guess I’m not sure there is anyghing that can be done.”

            Hunter said the change has nothing to do with science.  “They decided to renege,” he said, accusing modeling companies of caving to pressure from insurers.  He said the panel “was a cover for what they knew they were going to do …  Everyone knew five to six years ago that we were into a 20-year to 30-year high-frequency period.”

            RMS did not return phone calls for comment.

            Hunter has been a consulting actuary with nearly 40 years of experience with the insurance industry, analyzing major public policy issues.  He’s testified before the U.S. Department of Labor, the Department of Health and Human Services, Environmental Protection Agency, General Accounting Office and Congress.  He also worked for the Federal Insurance Adminsitration for 10 years, served a sinsurance commissioner for Texas from 1993 to 1994 and wrote numerous reports, articales and papers on the insurance industry.

ahenson@keysnew.com