Creation of Hurricane Models

According to Fanoe, hurricane models are generally a merge of meteorological expertise, engineering expertise, and insurance expertise. “Most models will start with the [meteorological] portion of the model, which is projecting out potential hurricanes, determining the frequency with which they’ll occur, and the path they’ll take if they do occur,” said Fanoe. “Then, we project the path [a hurricane] will take, including where it will make landfall, what will happen once it makes landfall, and how much the wind speed will slow down.” Then, there is the wind field assessment, which determines what areas are being affected and by how much wind. “This allows you to map out all of the homes and buildings that are impacted by wind and how much wind there is,” said Fanoe. “Wind fields feed directly into the [engineering] component of the model.” The combination of the meteorological and engineering components produces an estimate of how much damage is done to every home within the wind field of the model, which leads to insurance expertise. “This component looks at what homes are written by an insurer, what the limits are on those homes, and what the deductibles are on those homes,” Fanoe explained. “What the overall limits are is how reinsurance comes into play. That is used to project the loss that a particular insurance company is going to take related to that storm.” While this is a very simplified take on how hurricane models work, it is important to understand that since they utilize meteorological, engineering, and insurance expertise, it takes multiple different experts to create them. There also can be a lot of different versions of these models. That being said, almost every model will have a long-term and short-term version of that model. “The only difference between the long and short-term versions of the model is in the frequency assessment of the hazard model,” Fanoe shared. “A long-term model will use usually 100-year or more averages of the actual landfall rates of hurricanes in the U.S. to project that frequency. A short-term model will be based on shorter-term averages.”

How Insurance Companies Use Hurricane Models

Since hurricane models are very complicated, Darby revealed that the Maine Bureau of Insurance requests information on each CAT model in the filings as well as the version number that they’re using for their CAT load. Then, they look down to the Florida Commission of Hurricanes to see if they’ve approved that model. If Florida has approved it for use in Florida, then Maine allows it for use in their rate filings. “We follow this process because I do not have the expertise to review the CAT model as it is,” Darby explained. “That being said, we do have 3,500 miles of coastline here in Maine, and even though our hurricanes are usually category one or two, we’re still concerned about having a large coastline in the future.” With this in mind, it is important that insurance companies are building in enough load in their rates so that they maintain solvency.

Education & Regulation of Hurricane Models

While some states, like Maine, do not have a coastline that is much impacted by severe hurricanes, Gupta believes it has become increasingly important for regulators to build knowledge and understanding of CAT models. “[Regulators] are key stakeholders when it comes to managing the insurance marketplace within their states,” she said. “They need to ensure that their markets are healthy and solvent with increased catastrophic and climate risk and that there is availability and affordability of insurance.” Historically, the knowledge and understanding of CAT models have been limited in the regulatory community for many reasons. “One is simply the lack of access to model documentation due to the proprietary nature of these commercial CAT models,” Gupta shared. “So, the documentation or the knowledge doesn’t exist in a public state that is readily available for regulators.” The other, she explained, is the fact that these are complex models. “There are not enough standard resources that exist within individual state DOIs and within the NAIC around these CAT models,” Gupta stated. She is currently trying to change this with her work at the NAIC. Gupta’s role focuses on bridging the educational gap and building knowledge within the regulatory community. “We have actually developed a foundational course around these CAT models that is peril agnostic,” she revealed. “The course focuses on different components of the CAT model framework, the input-output, and the application of CAT models.” The NAIC plans to expand this training program to specific perils, which will go more in-depth depending upon individual states’ needs.

If you would like to view the presentation again in its entirety, please click the video above.

Questions? Please don’t hesitate to reach out to any of the featured speakers through the contact information below.

Linda Jancik
Product Manager – Personal Lines (AAIS)
lindaj@aaisonline.com

Greg Fanoe, FCAS, MAAA
Director & Consulting Actuary (Davies)
gfanoe@merlinosinc.com

Sandra Darby
Property & Casualty Division Actuary (Maine Bureau of Insurance)
sandra.c.darby@maine.gov

Shaveta Gupta, CPCU, ARM, ARe, CCM, CCRMP
Catastrophe Risk & Modeling Advisor (NAIC)
sgupta3@naic.org

The post Webinar: Hurricane Models – Creation, Usage, and Regulation first appeared on AAIS.

Overview of the Regulation

In October 2022, the California DOI passed the regulation requiring an insurer to offer specific mitigation factors. Westcott explained that the determination for whether this applied to consumers’ currently filed rate was whether they used the wildfire risk model, or the rating plan segmented a policyholder’s rate based upon the policyholder’s wildfire risk. “The regulation addresses two types of mandatory mitigation factors as well as the community level and property level mandatory mitigation factors,” Westcott described. “The property level factors cover mitigation measures addressing both the immediate surroundings at the structure, often referred to as ‘defensible space,’ as well as the buildings hardening measures performed on the structure itself.” The regulation further identifies some optional factors relating to wildfire loss that an insurer may incorporate into the rating plans as long as the resulting rate is not excessive, inadequate, or unfairly discriminatory. Westcott shared that throughout the regulation, there are administrative requirements an insurer must follow. “Many of the requirements are around transparency and providing information regarding the mitigation credits to your policyholders,” she said. In addition, each company is still required to make a filing even if your advisory organization has filed with the department.

Wildfire Mitigation in AAIS Manual

Linda Jancik explained that this regulation affected the homeowners by peril (HOBP) and homeowners by composite (HOC) programs at AAIS the most. Filings* were also done for agricultural output, commercial output, and inland marine guide-motor truck cargo. Wildfire risk mitigation credits are available in both California HOBP and HOC programs in the AAIS rule manual as separate rules. “The reason [for this] is that there are different ways of premium determination for these two programs,” Jancik explained. “Because in HOBP, wildfire can be isolated, whereas in HOC, their combined loss costs do not allow it to split up into individual programs.”

There are three categories of wildfire risk mitigation credits available: community coordination, property hardening, and defensible space. “Whereas the community coordination credit applies to the community you live in, property hardening measures, as well as defensible space measures, can be influenced by the policyholder,” said Jancik. “So, we can’t suppress our way out of wildfire.” She believes that communities that are coordinated, collaborative, and consistent in their wildfire mitigation efforts are likely to have lower losses and better outcomes. Property hardening measures relate to all building characteristics that help reduce wildfire risk. The risk of wildfire damage to buildings is also dependent on preventative measures such as ensuring that the area surrounding the building is clear of excessive flammable material and debris.

Rating Impact

For the community coordination credit, AAIS is proposing a 4% wildfire credit for being recognized in a FirewiseUSA site in good standing. “This 4% is larger than most of our other credits,” Mike Payne relayed. “We wanted to recognize that they have a lot of activities going on; they’re really committed. So, it was a little bit more robust.” In a California fire risk reduction community, AAIS is proposing a 1% credit. It’s a relatively new program, according to Payne, which is why it is different from the FirewiseUSA sites. “But these two pieces are technically mutually exclusive,” he added. “So, you could be in one or both of those types of communities [and] your maximum wildfire credit for community coordination would be 5%.” AAIS is proposing a 1% credit for each of the property hardening credit type activities (Class-A fire-rated roof, enclosed eaves, etc.) “It might seem small, but we really wanted to try and emphasize the fact that when you do more of these, they add up and you’ll get more of a benefit,” Payne explained. The same applies for the defensible space credit. “Again, assuming all five activities are met, you would get the 5% compounding impact and you add those together to get a total of 10% for maximum wildfire credit for defensible spaces,” said Payne. “If you add up those three components together, we are proposing a maximum of a 25% credit to the wildfire portion of the loss costs.”

Rethinking Consumer Notices & the AAIS Consumer Notice Tool

When discussing wildfire mitigation, one of the key factors that comes up is how to incentivize homeowners to take action. “The regulation that’s been put forth by CDI goes a long way to start driving change and homeowner behavior,” said Matt Hinds-Aldrich. “But we still need to instill a sense of urgency. [AAIS] discovered the importance of the consumer notice.” Because this regulation puts a lot of focus on actuarial analyses and being compliant with the law, the consumer notice tends to become an afterthought. “[AAIS] started realizing that there’s a real missed opportunity here,” Hinds-Aldrich claimed. “So, we spent time developing a consumer notice model.” In doing so, AAIS identified three key issues that needed to be addressed: comprehension, accessibility, and motivation aspects.

When creating the consumer notice sample, AAIS believed that if it was kept short, succinct, and relevant, homeowners would take full advantage of it. Information can either be put in manually through drop-down menus or in an automated fashion at scale. “Whatever the reading is, or variables that are selected, [the form] will automate all of the remaining information,” Hinds-Aldrich explained. The other component worth noting is that this form is entirely customizable by any AAIS member. “Everything can be changed from the colors to the verbiage,” Hinds-Aldrich shared. “[We] recognize that carriers are going to have to make their own choices and may have different variations when they do their own filing.” AAIS has also created a separate version of the consumer notice tool that allows companies that use catastrophic wildfire risk models to disclose the model that was used and how it operates.

If you would like to view the presentation again in its entirety, please click the video above.

Questions? Please don’t hesitate to reach out to any of the featured speakers through the contact information below.

Linda Jancik
Product Manager – Personal Lines
lindaj@aaisonline.com

Mike Payne, FCAS, MAAA
Chief Pricing Actuary
michaelpa@aaisonline.com

Matt Hinds-Aldrich, PhD
Senior Risk Strategy Lead
matth@aaisonline.com

*Note that filings for these programs have not yet been approved.

The post Webinar: Making Wildfire Mitigation Meaningful: Addressing California’s Mandatory Wildfire Mitigation Credits Regulation first appeared on AAIS.