Florida has begun two year review of loss models in the hopes of pushing its insurance “privatization” measures for personal lines residential flood.
Started this week and set to be completed in 2017, the state is hoping to approve several loss models for private insurance and reinsurance carriers to write flood policies with the goal of moving the peril away from the publically-backed Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund.
“This is part of a larger review to make sure that any models that are used [by insurers] meets certain scientific rigor,” says Dr. Jack Nicholson, chief operating officer of the Florida Hurricane Catastrophe Fund and a member of the Florida Commission on Hurricane Loss Projection. “We want a model that can be validated and model that will used to justify rates.”
Earlier this year the Florida legislature passed a bill making it easier for private insurers to write flood insurance following the implementation of the federal legislation increasing flood rates. Although the Homeowner Flood Insurance Affordability Act lowered the rate increases on some policies, the state is moving ahead with its efforts to build a private market for flood insurance.
The state would be significant private market insurers and reinsurers looking to cover flood. The National Flood Insurance Program writes more flood insurance policies in Florida than any other state. Currently, only a few carriers have been writing flood policies in the state.
Florida is working with several basic principles when it comes to flood models, according to presentation material from this week’s meeting — including:
- Hurricane modeling and flood modeling should be independent of one another.
- There should be separate hurricane standards and flood standards.
- Flood damage is caused by the flood peril and therefore flood standards, although they may be similar in nature and structure to hurricane standards, need to be unique to the peril of flood.
- A flood modeler will not need to refer to a hurricane standard and vice versa.
- The failure of a hurricane model will not impact the acceptability of a flood model and vice versa.
Nicholson explains that the review of flood loss methodologies was still in the earlier stages and that the lessons the state has learned in modelling wind does not apply to water. This is mainly because the impact of elevation, or where a property sits in relationship to sea level, can have a significant impact and it is not something the state has measured previously.
“We have some very detailed standards when it comes to wind, but in that case you are mainly concerned with longitude and latitude,” Nicholson explains “How a model will determine elevation, and justify their elevation measurement is key.”
Any model will also need to reliably measure an insurer’s probable maximum loss consistently since flood can easily chip away at a balance sheet if not done correctly, Nicolson says. “If a company only writes flood, your are looking at its exposure will need to run the model to be as accurate as possible on PML,” he said. “There needs to be identifiable standards for that.”
The state will review basic flood concepts over the coming months, including to listening to private market modelling firms AIR Worldwide, Risk Management Solutions and EQCAT, as well as independent hydrology and flood research experts, according to Nicholson.
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