Impact of Model Updates


Model updates have been addressing the fact that modeled losses have in past years underestimated actual losses and potential losses. As models increase projected losses, capital requirements increase, thereby driving up prices.


“When you start to see a probable maximum loss increase in the model, that’s going to increase an insurer’s capital requirement. When that happens, everyone wants a return – justifiably so – from that capital.”


Erik Nikodem, Lexington Insurance


Model upgrades, particularly the February 2011 release of RMS (Risk Management Solutions) Version 11.0, attempt to recognize that the damage caused by the various storms of the past decade generally exceeded modeled loss estimates. One area in particular was the prospect of higher inland losses because of the understanding that wind speeds can carry much farther inland. The ultimate impact on insurers is a re-allocation of capital to cover the increases in projected losses. Insurers seek an appropriate return on that capital, so correcting rates and tightening terms and conditions are the two means by which to achieve that.


Copyright © 2012 by A.M. Best Company, Inc. All rights reserved. No part of this report may be reproduced, stored in a retrieval system or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise.


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