Why Insurance Rates Will Decline in 2014

MIAMI—In effort to predict exposure in catastrophic storm, insurance companies run new models every few years. These predictions help determine how much capital they need on hand to handle, say, a massive hurricane.

To draw these conclusions, analysts rely on various data points, including water temperature trends, climate information, and of course, past claims. In July, the latest model, the 13.0 version, came online.

The new model offers good news: potential losses may not be as severe as they have been for the past three years. And that, in turn, could lead to lower premiums over the next six to 12 months.

So says Matt Harrell, managing director of Franklin Street's Insurance Group. He expects that one or two companies will be first in the market to lower prices to gain more market share, and then others will follow.

“Insurance carriers use these catastrophe models to project the potential losses of an exposed risk and rely on these results to help them determine the appropriate premium to charge for the property insurance,” Harrell tells GlobeSt.com. “The industry leader in the development of these models is Risk Management Solutions (RMS).”

When version 11.0 was released few years ago it increased loss projections as much as 30%, causing carriers to then increase their premiums in a similar fashion. This past July, RMS released its latest model, version 13.0, which is now decreasing many of the loss projections that had increased under version 11.0.  

“These decreases could reach into the double digits and is expected to affect the majority of Florida as well as the Gulf-Coast and Mid-Atlantic states,” Harrell says. “The commercial properties that will not experience a decrease with version 13.0 are those where the property carrier is providing flood coverage. This is because the new model increases the loss projections for storm surge losses and can sometimes be greater than wind losses from a hurricane.”

With the release of the new RMS model combined with the potential for an inactive hurricane season, Harrell says we could expect to see insurance rate decreases come as soon as the end of the year. He expects to see more significant declines in 2014: “I recommend speaking with your insurance broker to find out when your carrier will begin implementing the new RMS model and how they expect it to impact your pricing as the decreases could be in the double digits.”