State Lawmakers Get Cat Model Update

Insurance regulators are ramping up plans to create a publicly funded catastrophe model by launching a $200,000 feasibility study focusing on a multi-peril model for natural catastrophe risks.

Eric Nordman, director of research for the National Association of Insurance Commissioners (NAIC), said the study’s funds are being used to employ two property/casualty actuaries and several consultants with knowledge of rate regulation and public policy.

Nordam made his comments at Friday’s meeting of the National Conference of Insurance Legislators in Washington, D.C.

Although no deadline has been set for completing the study, Nordam said that one of the first milestones will be creating a fiscal impact statement that will be submitted at the NAIC’s next public budget hearing.

The NAIC study will initially focus on expanding the use of the Florida Public Hurricane Model, which was developed by state regulators in 2005 as a way to keep a check on rate filings.

“The model will be used for solvency monitoring, for rate regulation and for adding more sophistication to risk based capital measurements,” Nordman said. “The plan is to start with Florida’s model and then build on that.”

Nordam added that the study will also consider including other perils — such as earthquake — to expand the model’s use in other states.

Creating a multi-peril model has its own challenges, Nordam said. “The initial foray into this will focus on hurricane and earthquakes and it’s mind boggling when you try to include other perils,” he added.

Much of the property/casualty industry remains opposed to the creation of a publicly funded catastrophe model for a number of reasons, said Deirdre Manna, vice president of industry and regulatory affairs with Property Casualty Insurers Association of America.

The primary concern is the cost of creating a model, which Manna argues will be simply passed onto P/C companies.

“One of our main concerns is that this is a very expensive project to undertake,” Manna said. “In talking to the modeling companies they estimate [it could be] in the millions. One modeler said off the cuff it could be $20 to $25 million.”

Manna also argued that a publicly funded model could result in the catastrophe loss estimates being “politicized” to fit local public policy goals.

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