Models being used to gauge risk on specific properties and policies bogged down in complex language are some of the shortcomings of the current natural catastrophe insurance market, according to a letter penned by the Risk and Insurance Management Society, Inc. to the Federal Insurance Office.The letter from RIMS was sent last week in response to a request for comment to help Federal Insurance Officer Director Michael McRaith conduct a study of the U.S. natural catastrophe insurance market. The group also commented in the letter on other various aspects of natural catastrophe insurance.
In the letter, RIMS writes the market tends to be highly volatile and one way of stabilizing it would be to rely less on modeling of specific properties to assess risk. Modeling cannot be accurately used on just one specific property, arguing that it was originally intended and designed for broad use, the group wrote. "As the modeling zooms in to a specific building, school, etc., then the reliability of that modeling lessens, which can lead to a higher risk factor and thus higher rates for that specific property," the group wrote.
Another way to cut down volatility would be to create a pool to allow insurers to aggregate premiums to fund future losses, RIMS suggested.
Natural catastrophe insurance might have a higher take-up rate if policies were simpler, leading more people to understand the benefit, RIMS wrote. The simplification could help the insurance industry repair the perception that it tries to get out of paying claims because of confusing language and claims processes. It might also lead to a broader base of insureds, which could lower premiums, the letter said.
"Doing away with carve-outs or exclusions for such things as storm surge would give the consumer a higher sense of security that they are fully covered regardless of whether flood damage is caused by wind or 'rising flood,'" the letter said.
Disputes over policy language often leads to court following natural catastrophes. That has been the case in Hurricane Sandy with a New York restaurant and a hotel that are suing their insurer over the cause of a power outage flooding or an explosion.