Regulating Hurricane Insurance Loss Costs Produced by Computer Models

1. Regulating Hurricane Insurance Loss CostsProduced by Computer Models Presented to the CAS Seminar on Reinsurance June 1-2, 2006 by Martin M. Simons MAAA, ACAS, FCA Public Actuarial Consultant

2. Florida Commission on Hurricane Loss Projection Methodology • Hawaii Hurricane Model Review Committee • Insurance Rate Filings and Hurricane Loss Estimation Models

3. FCHLPM Commission Insurance Consumer Advocate FHCF Executive Director Executive Director of Citizens P.I.C. Director of Emergency Management FHCF Advisory Council Actuary Florida OIR Actuary P & C Company Actuary Professor of Insurance Finance Professor of Statistics Professor of Computer Science Professor of Meteorology

4. Accurate • Designed and constructed in a careful, sensible, and scientifically acceptable manner such that they correctly describe the critical aspects needed to project loss costs

5. Reliable • Consistently produce dependable results and that there is no inherent or known bias which would cause the model or technique to overstate or understate the results

6. Professional Team • Meteorologist - Dr. Jenni Evans • Structural Engineer – Fred Stolaski • Actuary – Marty Simons • Statistician – Dr. Mark Johnson • Computer Scientist – Dr. Paul Fishwick

7. Standards • To be determined acceptable, the model must have been found acceptable for all Standards. • If the model fails to be found acceptable, by a majority vote, for any one Standard, the model will not be found to be acceptable.

8. Standards • General (5 standards) • Meteorology (6 standards) • Vulnerability (2 standards) • Actuarial (9 standards) • Statistical (6 standards) • Computer (7 standards)

9. Forms • General – 6 Forms –(expert certification) • Meteorological – 3 Forms + Official Hurricane Set • Vulnerability – 2 Forms • Actuarial – 9 Forms • Statistical – 5 Forms

10. Hawaii Hurricane Model Review • Initiated in 2001 • Updated June 30, 2003 • Based on FCHLPM reviews • Composition – • Actuary – Marty Simons • Engineer – Gary Chock • Meteorologist – Tom Schroeder

11. Objective • to ensure that models used to produce property insurance loss costs in Hawaii appropriately consider Hawaii hurricane characteristics and frequencies, Hawaii construction types and Hawaii land use and land cover data in their development.

12. Hawaii Model Review Questions • Twenty-one questions, some with several subparts. • Does the model provide reasonable consideration of: • Hawaii hurricane history (windfield) • Pacific hurricanes • Hawaii topography • Hawaii building stock • Hawaii land use – land cover • Hawaii policy language

13. Hawaii Model Review Questions 2. Is the model the same as that which has been accepted by the Florida Commission on Hurricane Loss Projection Methodologies (FCHLPM)? If not, describe the major differences.

14. Hawaii Model Review Questions 7. Provide details of the impact of each of the following criteria on the creation of the stochastic storm set: • Hurricanes vs. tropical storms, Pacific vs. Atlantic storms, historical time period, central pressure, wind speed, land friction, surface roughness, weakening, topography, atmospheric conditions, by-passing storms

15. Hawaii Model Review Questions 9. Provide the 100 and 500 - year recurrence interval 3 second gust wind speeds for the following airport locations: • Lihue • Honolulu • Kahului • Hilo

16. Hawaii Model Review Questions 12. a) Describe the basis of vulnerability function development relative to Hawaii construction characteristics. 12. b) Describe the studies and methods used in the development of the building stock. 12. c) Describe the studies and methods used in the validation and verification of the building stock.

17. Hawaii Model Review Questions 12. d) Describe the studies and methods used in the development of the vulnerability functions. 12. e) Describe the studies and methods used in the validation and verification of the vulnerability functions. 12. f) Describe the studies and methods used to determine that the construction characteristics within the model appropriately reflect Hawaii construction characteristics.

18. Hawaii Model Review Questions 16. Provide the total aggregate zero deductible personal residential (homeowners plus dwelling policies) losses produced by your model for Hurricane Iniki. 17. Provide comparisons (in as much detail as model and data will allow) of actual losses with model output losses for Hurricane Iniki.

19. Hawaii Model Review Questions 21. Provide the two dimensional instantaneous windfield for the island of Kauai at the time of landfall for Hurricane Iniki as developed by the model at a one-mile grid resolution.

20. Insurance Rate Filings and Hurricane Loss Estimation Models • Journal of Insurance Regulation, 4/2004 • By Charles C. Watson, Jr., Mark E. Johnson, and Martin Simons • 324 Public Domain Model Combinations

21. Public Windfield Models Wind Field • Rankin Vortex • Holton (1992) • Miller (1967) • SLOSH (Jenesnianski, et al., 1992) • Stand. Project Hurricane (Schwerdt, et al,1979) • Bretschneider (1972) • AFGWC (Brand, et al., 1977) • Holland (1980) • Georgiou (1985)

22. Public Friction (Boundary Layer Models) • None (Schwerdt, et al., 1979) • Cell-based (Cook, 1985) • ASCE (2000) • Trajectory (Watson, 1995)

23. Public Damage Functions • Australian (Leicester, et al., 1978) • Foremost (1996) • Friedman (1984) • Clemson 1 (Sill, et al., 1997) • Clemson 2 (Rosowsky, et al., 1999) • Professional Team (FCHLPM, 2002) • X-cubed (Howard, et al., 2972) • Energy (Watson, 2002) • Stubbs (USAID/OAS, 1996)

24. Study Criteria • Topography: US 90 meter DEM from USGS • Land Cover: NASA/UMD 250m Global Land Cover data set (Spring 2003) • Track: 1851-2002 revised HURDAT data from NHC • Exposure: Census 2000 Block Group data (the STF3 data set).

27. Other Hurricane Prone States • Model review committee • Meteorologist • Structural Engineer • Actuary • Determination that the model being reviewed appropriately considers individual state criteria

28. Individual State Criteria • Meteorology Hurricane frequencies Hurricane tracks Hurricane strengths Land Use Land Cover • Vulnerability Construction Characteristics Building Codes and Enforcement • Actuarial Policy Language Insurance Company Practices

29. Models Accepted by the FCHLPM(May 2006) • AIR Worldwide Atlantic Tropical Cyclone Model V8.0 Program CLASIC/2 v8

30. Models Accepted by the FCHLPM(May 2006) • ARA - Applied Research Associates HurLoss Version 3.4

31. Models Accepted by the FCHLPM(May 2006) • EQECAT, Inc. USWIND 5.10/WORLDCATenterprise 3.8

32. Models Accepted by the FCHLPM(May 2006) • RMS – Risk Management Solutions RiskLink 5.1a

33. Some Additional References • Hurricane Best Track Files (HURDAT), Atlantic Tracks File www.nhc.noaa.gov/pastall.shtml • Tropical Prediction Center/National Hurricane Center (TPC/NHC), Tropical Cyclones of the North Atlantic Ocean, 1871-1998, with updates • Information from the FCHLPM www.sbafla.com/methodology/ • Watson, Charles C., Johnson, Mark E. and Simons, Martin M., Insurance Rate Filings and Hurricane Loss Estimation Models, Journal of Insurance Regulation, April 2004. • Iman, Ronald L., Latin Hypercube Sampling, Encyclopedia of Statistical Sciences, Update, Volume 3, 1999 • Actuarial Standard of Practice, number 38