The SC Department of Insurance issued an order last month relative to insurers’ use of catastrophe models. This order follows the public hearing conducted Oct. 9, 2013 and incorporates recommendations from the Catastrophe Model Review Panel based upon their evaluation of the use of hurricane catastrophe models in rate filings in South Carolina. Complete text can be found at
www.doi.sc.gov/DocumentCenter/View/7324.
In summary, the order outlines the following:
- South Carolina law permits the use of catastrophe modeling in rate filings;
- Hurricane models are generally accepted as the best available tools for estimating prospective costs for these specific exposures;
- and that each catastrophe model provides a reasonable reflection of hurricane history and intensity.
The report acknowledged the following general recommendations (many of these suggestions were already being done by the SCDOI before the report was released):
- Expected hurricane losses should not be determined solely based on historical data.
- The SCDOI does not allow filers to rely exclusively on historical data for hurricane loss cost projections
- Losses from tropical storms and tropical depression should not be counted in “all other wind” and hurricane losses. The SCDOI does not allow for double counting of losses.
- Only long-term models should be used in rate filings. The SCDOI does not allow for the use of short-term models in rate filings.
- The SCDOI should obtain an output report with a company’s filing to see if modifications to the model have been made. The catastrophe modeler or insurer should provide these details to the SCDOI.
- Models should not be permitted if they include surge losses. The SCDOI does not permit surge losses to be included in models.
The report also included model-specific recommendations, many of which led to the general recommendations. The review included four models: ARA (not currently used in SC), AIR, ARM, and EQECAT. The SCDOI has represented that as a result of the panel’s recommendation, and following subsequent information, three models (AIR, EQECAT, and RMS) are approved for use in rate filings in South Carolina.
The DOI has stated that the laws governing the use of catastrophe models and reviewing insurance rate filings are well defined. South Carolina will not produce a state-specific catastrophe model, but will develop a procedure to address the appropriateness of models’ use in the future. For hurricane models not subject to review by the independent catastrophe model review panel, the DOI will continue to rely on reports and reviews provided by the Florida Commission.
The DOI will issue a Bulletin within 90 days of this order to implement the recommendations set forth in this order.