RMS Defends ‘Near Term’ Hurricane Model, Denies Collusion

By | March 30, 2007

In the wake of a flurry of critical comments made by consumer activist groups aimed at the methodology Risk Management Solutions employed to establish “near term” hurricane models, RMS’s public policy department fired back with a rebuttal.

“Our model reflects the widespread agreement among researchers that hurricane activity in the North Atlantic has increased since 1995 and that this period of elevated activity will last for at least another 10 years,” said Mitch Sattler, vice president of public policy at RMS. “The long-term historical average significantly underestimates the hazard posed by hurricanes for the foreseeable future.”

J. Robert Hunter, director of insurance for the Consumer Federation of America and Birny Birnbaum, executive director of Center for Economic Justice, wrote a letter to the National Association of Insurance Commissioners and state insurance regulators accusing RMS of being in cahoots with insurers that have a stake in coastal property risks.

“RMS has become a vehicle for collusive pricing,” Hunter charged. “The huge increase in rates that ultimately occurred because of inaction by NAIC and several states was due to pressure from insurers.”

But Sattler said the duo’s letter misrepresents RMS’s efforts and that criticisms leveled at RMS models are unjustified and draw heavily on statements pulled from “misleading newspaper articles.”

“The objective risk metrics provided by RMS models are based entirely on science and are in no way driven by any collusive practices or pressure to produce results that appear to be favorable to the insurance industry,” Sattler said.

Birnbaum used the word “sham” in reference to RMS’s claim that its catastrophe models are scientifically sound.

Hunter added, “The wheels are coming off of the ‘science’ that RMS said it employed.”

According to Sattler, there are clear limitations to models that produce a static view of risk that relies solely on the historical long-term average.

“Ignoring this fundamental fact only steers discussion away from the vital issue of determining the best actions for mitigation and other risk reduction measures,” Sattler said. “RMS has submitted its hurricane model to the Florida Commission on Hurricane Loss Projection Methodologies for approval and we fully expect it will recognize the rigorous science upon which our work is based.”

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