Recent computer models predicting that more hurricanes will strike U.S. shorelines have vastly overestimated the financial losses suffered by insurance companies, according to a new analysis.
So far, at least.
The simulations, called "near-term models" because they predict storm strikes over five years, were launched in 2006 after two vicious seasons of landfall hurricanes, including Katrina, crushed homes and businesses along much of the Gulf Coast and Florida. The models emphasize rising storm risk caused by warmer ocean water.
Now, with only one year left in those first forecasts, the models issued by three different firms have so far overshot the level of damage by tens of billions of dollars. A string of relatively benign hurricane seasons began just as the models were introduced.
Storms caused $13.3 billion in damages between 2006 and 2009, far below even conservative expectations. Near-term models predicted much deeper devastation, ranging from $48.8 billion to $54.6 billion during that same period.
"Four years into the five year projection period, the near term models have not performed well as predictive tools. Hurricane activity changes markedly from year to year, and the active hurricane seasons of 2004 and 2005 have not proven to be harbingers of a continuing trend for 2006 through 2009," says a report by Karen Clark & Co., a risk management firm operated by an early architect of catastrophe models.
Near-term models are something of an experiment. Unlike traditional models, they don't use a century's worth of hurricane data related to frequency, landfall and wind speed. Instead, modelers input information from the warmest -- and most dangerous -- periods of the past. That's when hurricanes tend to strike with a fist.
Models lack 'credibility'
The models' use raises concern among some insurance regulators and consumer advocates. Indeed, many states prohibit insurers from using near-term models to justify rate hikes, saying the outcome is based on a historical timeline that's too short. Florida set the pace. It's by far the nation's biggest target for hurricanes, and many other Gulf states have followed its lead in barring near-term models.
Even in states that allow them, regulators look carefully at insurers that heavily base their rates on the potential for climatic cataclysms.
"I'm very cautious about using near-term models because ... I believe they're lacking in credibility," said Thomas Sullivan, the insurance regulator in Connecticut. "I believe there was an overreaction to [the seasons of 2004 and 2005], and everybody took '04 and '05 and ran with it and put it into their near-term models. Pardon me, I think that's a little reckless of an approach. I think we need to look over a longer period of time."
One modeler acknowledged that the estimates were way off. But it's unfair, he said, to judge a new scientific tool with just four years of performance. All models, including the widely used simulations that incorporate 110 years of data, overestimated damages during the quiet period since 2005, he adds.
Those long-term models, which supporters say are better predictive tools, estimated $40 billion in damages in the past four years. That's three times the actual amount of destruction.
"There's still a lot of uncertainty. Even in this warm phase, there's still a lot of years when there's zero [hurricanes]," the modeler, Tom Larsen, senior vice president with EQECAT, said in an interview. "It's a little bit of humility to explain to [clients] that there are a lot of things we don't know. We can't predict the weather. All we can do is provide reasonable forecasting tools that are based on what we've seen in the past."
'Very ominous' future
This is one flashpoint in the insurance industry as it shifts to address future threats that scientists warn could be sparked by climate change. Stronger wind speeds in the biggest hurricanes are one danger.
The new models surfaced in the "decade of destruction," said Robert Hartwig, an economist and president of the Insurance Information Institute, an industry group. Insured losses in the United States rose from $89 billion in the 1990s to $193 billion in the 2000s, a 117 percent escalation.
"These loss trends are very, very ominous indeed, and they portend an even more disastrous decade in the future," Hartwig said. "There is absolutely nothing that suggests that catastrophe losses in the 2010s will be lower than they were in prior decades, and in fact, everything suggests they will be higher, and in fact, potentially, much higher."
There's an overriding reason for that new damage: More people are building on the coasts. More natural catastrophes are also a factor, but there's sharp debate about the effects of climate change today, and whether it is already accelerating damages related to things like flooding.
There is no mention of climate change in the modeling report, but it tries to provide an answer to the confusion around hurricane frequency. It concludes that there hasn't been an increase. It's just that scientists are better at detecting the swirling storms that have always existed.
"This is particularly true for short duration storms originating in the Eastern Atlantic, far removed from potential landfall," the report says. "Prior to the introduction of satellite technology, such storms were dependent upon oceangoing ships for detection."