Report Rejects South Carolina-Specific Catastrophe Model
Citing significant costs and limited upside, a panel charged with exploring a homegrown windstorm model for the Palmetto State said it should not be developed.
“The benefits of a South Carolina specific public model appear marginal and, at best, are unclear, while the costs associated with developing and maintaining a public model are significant,” the report released last week states. “Such a model is unlikely to be fully transparent and there is no guarantee that it will produce lower rates for property owners.”
Last year legislation was passed that required the South Carolina Department of Insurance to conduct a study and assess the possibility of the government developing its own hurricane model, “including an evaluation of whether it would yield more accurate assessments of risk and better rates.”
The legislation was passed after local legislators criticized the transparency of third party private market models from AIR Worldwide, EQECAT and Risk Management Solutions (RMS).
Florida is currenlty the only U.S. state thus far to develop its own public windstorm model.
The report produced by Prof. Colin Jones and Prof. Greg Niehaus of the University of South Carolina’s Darla Moore School of Business — as well as Mark Brannon of consulting firm Merlinos & Associate — argued that negligible benefit for the South Carolina to take on catastrophe modeling.
Since existing private market hurricanes have “incentives to innovate and to develop more accurate models” a model created by state would not receive “more weight” when creating property rate filings and “at most, the public model could be given equal weight” the report states.
In addition, any model created wound not necessarily be more transparent than existing models and create unintended consequences “which may impact insurers’ willingness to write in the state.”
Another significant hurdle, according to the report, is the cost associated with developing a state-backed catastrophe model.
The report pegged the tab between a “minimum” of $7,316,500 over the first five years and $916,000 per year in operating costs.
Rather than develop its own model the panel recommend that the state explore using a fourth modeling firm — such as ARA, Watson & Johnson , RiskInsight or OASIS — to act as check against other private market vendors. It also suggested the state could “Florida International University to build a South Carolina model component.”
“There are several alternatives that would provide similar oversight and validation of the private models used in rate setting at significantly lower cost than the development of a public model,” the report states.
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