Clark Says Hurricane Models Overestimated Losses

Boston-based consulting from Karen Clark & Company argues that the short-term models used by the three largest catastrophe modeling firms “significantly overestimated” cumulative losses for the last three North American hurricane seasons.

“This latest study further supports our previous findings that a short time horizon is not sufficient for credibly estimating insured losses from hurricanes,” firm CEO Karen Clark said in a press statement.

In the firm’s second annual study of near term hurricane models, the firm said AIR Worldwide, EQECAT and Risk Management Solutions projected near term insured loss levels at least 35 percent above the long-term average of $40 billion for the period 2006 through 2010.

Actual losses for the period turn out to be $13.3 billion, markedly lower than each firm’s near term projections and one-third the long-term cumulative average of $40 billion.

Clark argues that near term models — which were introduced in 2006 following Hurricane Katrina and Wilma — continue to provide problematic data to the insurance industry.

“Hurricane activity changes markedly year to year, and the 2004 and 2005 seasons have proven not to be harbingers of a continuing trend,” Clark said. “Given all the uncertainties, near term projections do not have sufficient credibility to be used for important insurance applications such as product pricing and establishing solvency standards.”

According the report, the 2009 Atlantic hurricane season was below average in the number of named storms, hurricanes and major hurricanes, and was the lowest frequency year since 1997.

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