SPECIAL REPORT

Florida insurers rely on dubious storm model

STAFF PHOTO / PAIGE ST. JOHN

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The Fairmont Princess in Bermuda, where RMS asked hurricane scientists to give it a glimpse into the future.

By Paige St. John

Published: Sunday, November 14, 2010 at 1:00 a.m.
Last Modified: Saturday, November 13, 2010 at 5:54 p.m.

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Hurricane Katrina extracted a terrifying toll -- 1,200 dead, a premier American city in ruins, and the nation in shock. Insured losses would ultimately cost the property insurance industry $40 billion.

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But Katrina did not tear a hole in the financial structure of America's property insurance system as large as the one carved scarcely six weeks later by a largely unknown company called Risk Management Solutions.

RMS, a multimillion-dollar company that helps insurers estimate hurricane losses and other risks, brought four hand-picked scientists together in a Bermuda hotel room.

There, on a Saturday in October 2005, the company gathered the justification it needed to rewrite hurricane risk. Instead of using 120 years of history to calculate the average number of storms each year, RMS used the scientists' work as the basis for a new crystal ball, a computer model that would estimate storms for the next five years.

The change created an $82 billion gap between the money insurers had and what they needed, a hole they spent the next five years trying to fill with rate increases and policy cancellations.

RMS said the change that drove Florida property insurance bills to record highs was based on "scientific consensus."

The reality was quite different.

Today, two of the four scientists present that day no longer support the hurricane estimates they helped generate. Neither do two other scientists involved in later revisions. One says that monkeys could do as well.
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