Hurricane risk data add pressure to insurance costs

The hurricane computer modeling company that kick-started the crisis with coastal home insurance three years ago -- and sent rates on Cape Cod and the islands soaring -- is back with more bad news.

Risk Management Solutions now says its earlier gloom and doom about the cost of potential hurricane damage in coastal areas was far too rosy. The California company is predicting that hurricanes will occur with much greater frequency and intensity over the next five years, and is telling insurers they need to increase their annual loss estimates by 25 percent to 30 percent in New England and the mid-Atlantic states, and 40 percent across the Gulf Coast, Florida, and Southeast.

The changes in Risk Management's computer model are expected to ripple throughout the home insurance industry, as the perceived higher hurricane risk translates into higher costs for insurers and higher premiums for owners of homes near the water.

''People don't understand it," said Senator Robert O'Leary, a Democrat from Barnstable who has fielded dozens of complaints from residents across the Cape and islands. ''It's just mind boggling."

Until three years ago, homeowners along the Massachusetts coast paid little attention to hurricane models and reinsurance costs. But that all changed when Risk Management tweaked its computer model and significantly increased the damage estimates from a hurricane striking coastal areas.

The new model convinced reinsurance companies, the firms that insure insurance companies against catastrophic events, that their risk was much greater than they had previously thought. That prompted them to increase their rates dramatically, which forced local insurers to charge customers higher premiums to offset the higher cost of reinsurance.

Some regional insurers, including the Andover Cos., Hingham Mutual Group, Vermont Mutual, and Quincy Mutual Insurance Co., went further, concluding the risk of doing business on the Cape and islands was simply too great. The companies scaled back their business in coastal areas or walked away entirely.

The exodus has been so great that the market share on the Cape of the Massachusetts Fair Plan, the state's home insurer of last resort, has increased to 33 percent today from 4 percent in 2000.

Industry officials say the new Risk Management model, due in May, is likely to lead to another round of premium increases and force more companies to put the Sagamore Bridge in their rear-view mirrors.

''It's still early, but I would expect there would be some upward pressure on rates," said Jack Golembeski, the president of the Massachusetts Fair Plan.

Most hurricane models use historical data to forecast hurricane frequency and intensity, but Risk Management says that approach is no longer sufficient.

''There's enough data and science to support the view that hurricane activity will be different from what it has been on a historical basis," said Paul VanderMarck, executive vice president at Risk Management.

Kerry A. Emanuel, a professor of meteorology at the Massachusetts Institute of Technology who served on a four-member panel of specialists consulted by Risk Management, said there are two schools of thought about Atlantic hurricane activity.

One school holds that hurricane activity rises and falls in multidecade cycles, with the Atlantic currently in an active cycle that is expected to last another 10 to 20 years. The other school of thought holds that climate warming is changing hurricane dynamics, and the ups and downs of the past are giving way to a more stable trend line that will increase long-term risks for insurers.

Emanuel says he supports the more pessimistic view. ''If it is correct," he said in an e-mail, ''there is then no reason to expect a decadal time-scale downturn in Atlantic hurricane activity."

AIR Worldwide of Boston, the other major hurricane modeling company, takes a more traditional approach, relying on long-term historical data to predict hurricane losses, and sees no need to alter its approach.

The Fair Plan's rate request for this year illustrates just how different the Risk Management and AIR models are. In seeking a 25 percent rate increase on the Cape, where its average premium is $1,306, the Fair Plan averaged the outputs of the two models.

''I certainly don't know which one is right, but it doesn't make sense to take just one and bet everything that it's accurate," Golembeski said.

But Attorney General Thomas F. Reilly did just that. In his Fair Plan rate filing, Reilly discarded the Risk Management model, which he said would yield a Cape rate increase of nearly 60 percent, and adjusted the AIR model on his own to yield a 1.2 percent increase.

The State Rating Bureau, a unit inside the Division of Insurance, used only the AIR model in its rate filing, calling for a roughly 20 percent increase in Fair Plan rates on the Cape.

Insurance Commissioner Julianne M. Bowler is expected to decide Fair Plan rates in June.

O'Leary, the senator from the Cape, says the long-term answer is for Massachusetts to create a catastrophic event fund backed by state bonding authority that would allow insurance companies to self-insure against hurricanes.

James MacPhee, senior vice president at Liberty Mutual Insurance Co., said the best way to fix the problem is to attract national insurers to Massachusetts who would have the resources to weather a catastrophic event. He said national insurers shun the state because they don't want to write auto insurance here.

''The number one way to fix the property-casualty market is to fix the auto insurance market," he said.

Time may be running out. AccuWeather.com, a Pennsylvania-based commercial weather service, earlier this month said conditions are ripe for a devastating hurricane of the magnitude that struck New England in 1938, leaving 600 dead.

''We're not saying New England is going to get hit this year. What we are saying is that the threat is increasing," said Ken Reeves, director of forecasting operations. ''It's not out of the realm of possibility that there could be Katrina-like damage."

Bruce Mohl can be reached at mohl@globe.com.