Insurers Love New Hurricane Study

Insurance companies say they are only a hurricane away from being obliterated by a killer storm producing thousands of claims, and need to charge higher rates in coastal states. No surprise, then, that they’ve embraced a recent study published in Nature – one that found the last decade of Atlantic Ocean hurricane activity was the highest in a thousand years.

The study by Penn State climate researcher Michael Mann also says the higher hurricane activity will continue due to high sea levels caused by global warming. The National Science Foundation funded Mann’s research, so critics can’t claim that the insurance industry had a hand in his conclusions.

But the rates insurers can charge for homeowners insurance is as much about politics as it is about science. Florida allowed many insurers to raise rates after eight consecutive hurricanes in 2004 and 2005. Florida governor Charlie Crist got elected in November 2006 on a rate relief promise. Insurance Commissioner Kevin McCarty quickly saw the light and started rejecting new rate hikes

Insurance commissioners continue to maintain that scientific proof of an increased hurricane cycle remains inconclusive. In the words of McCarty, “It is unlikely that any event or series of events that occurred 1,000 years ago have any predictive relevance for future losses.”  It’s a very convenient position to hold, particularly since it bolsters McCarty’s job security.

Insurers, on the other hand, lost $30 billion after the 2004 and 2005 hurricanes. State Farm, Nationwide and Allstate’s Florida property insurance subsidiaries would have gone bust if their parent companies had not injected new cash.

Insurer’s doomsday scenario: a category 5 hurricane hitting Miami and causing $87 billion worth of damage.

Plus, if Miami lucks out, the higher rates will also mean increased profits. Insurers say there’s nothing wrong with making money. Politicians, however, turn right around and accuse insurers of being too greedy.

Rates can be calculated two ways. The commissioners’ preferred method keeps rates down because it averages hurricane activity over the last 100 years to predict the likelihood of a storm in the future. Modeling companies hired by insurers adopted a shorter term model after the 2004 and 2005 Florida hurricanes. The model looks at the next few years and sees continued increased hurricane activity.

Enter Mann, the Penn state researcher. He has found a way to track hurricanes over the past 1,500 years — a big advance over formal weather records, which only date back to 1871. Mann examined the sediment in lagoons and embayments to estimate when the storms occurred. Mann’s study is only a month old, so it’s too early to see if there is a consensus in the scientific community. But the forecasting community has been edging toward acknowledgement that despite this year’s relatively calm weather, there is a trend towards more hurricanes.

State Farm announced earlier this year that it would drop the property coverage of its one million customers in Florida. The company has a major reputation for playing hardball when it doesn’t get its way. The insurer warned regulators that it would take drastic action if its 40 percent plus rate hike was rejected.

The Mann study is bound to be not only insurers new favorite book,  but will also be on the top shelf of modeling companies like Risk Management Solutions. RMS has been trying unsuccessfully since 1996 to get Florida regulators to approve its short-term hurricane model. RMS has already found a partial way around the roadblock. It sells the short-term model to unregulated reinsurers who sell back-up protection to insurers at higher rates. Insurers then pass along the cost to their customers.

What the insurers need is not another study, but billions of dollars of destruction to prove their point. Then, if they are still in business after paying storms claims, they’ll be likely to get their rate increase  — study or no study.