According to a press release from RMS, Inc. the state of Florida has rejected their risk assessment methodology based on using an expert elicitation to predict hurricane risk for the next five years. Regular readers may recall that we discussed this issue in depth not long ago. Here is an excerpt from the press release:
During the week of April 23, the Professional Team of the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) visited the RMS offices to assess the v6.0 RMS U.S. Hurricane Model. The model submitted for review incorporates our standard forward-looking estimates of medium-term hurricane activity over the next five years, which reflect the current prolonged period of increased hurricane frequency in the Atlantic basin. This model, released by RMS in May 2006, is already being used by insurance and reinsurance companies to manage the risk of losses from hurricanes in the United States.
Over the past year, RMS has been in discussions with the FCHLPM regarding use of a new method of estimating future hurricane activity over the next five years, drawing upon the expert opinion of the hurricane research community, rather than relying on a simplistic long-term historical average which does not distinguish between periods of higher and lower hurricane frequency. RMS was optimistic that the certification process would accommodate a more robust approach, so it was disappointed that the Professional Team was “unable to verify” that the company had met certain FCHLPM model standards relating to the use of long-term data for landfalling hurricanes since 1900.
As a result of the Professional Team’s decision, RMS has elected this year to submit a revised version of the model that is based on the long-term average, to satisfy the needs of the FCHLPM.
This is of course the exact same issue that we highlighted over at Climate Feedback, where I wrote, “Effective planning depends on knowing what range of possibilities to expect in the immediate and longer-term future. Use too long a record from the past and you may underestimate trends. Use too short a record and you miss out on longer time-scale variability.”
In their press release, RMS complains correctly that the state of Florida is now likely to underestimate risk:
The long-term historical average significantly underestimates the level of hurricane hazard along the U.S. coast, and there is a consensus among expert hurricane researchers that we will continue to experience elevated frequency for at least the next 10 years. The current standards make it more difficult for insurers and their policy-holders to understand, manage, and reduce hurricane risk effectively.
In its complaint, RMS is absolutely correct. However, the presence of increased risk does not justify using an untested, unproven, and problematic methodology for assessing risk, even if it seems to give the “right” answer.
The state of Florida would be wise to err in the decision making on the side of recognizing that the long-term record of hurricane landfalls and impacts is likely to dramatically understate their current risk and exposure. From all accounts, the state of Florida appears to be gambling with its hurricane future rather than engaging in robust risk management. For their part, RMS, the rest of the cat model industry, and insurance and reinsurance companies should together carefully consider how best to incorporate rapidly evolving and still-uncertain science into scientifically robust and politically legitimate tools for risk management, and this cannot happen quickly enough.