The threat of hurricane damage has pushed home insurance rates sky high for many coastal residents. But inland homeowners soon may be paying more, too, thanks to an updated model some insurance companies use to help set insurance rates.
The revised model by Risk Management Solutions (RMS) has found that risk from wind damage in some coastal locations is lower than expected, but is higher than expected in some inland areas.
Reams of new wind speed measurements indicate that hurricanes don't fall apart over land as much as previously believed, meaning they can inflict more damage on inland areas.
This is the first major overhaul to the RMS model since 2003. The new model includes information collected during Hurricane Katrina, which wracked the Gulf Coast in 2005, and the endless parade of hurricanes that hit Florida in 2004.
"The information for the most recent storms dwarfs the data" collected in previous hurricanes, says Ryan Ogaard, senior vice president of RMS.
Homeowners insurance companies use the data to help prove to states that they have enough capital to pay insurance claims in the event a hurricane pummels a state, he says
Florida rigorously checks hurricanes models and is seen as a bellwether for other coastal states when it comes to homeowners insurance and hurricanes.
The Florida Commission on Hurricane Loss Projection reviews and approves models so insurers can use them when determining rates. In June, the commission gave the green light to the new RMS model.
Under the new model, risk from wind damage in the coastal Miami area is lower than previously expected, while in the Orlando area the risk is higher than previously believed.
When a hurricane strikes, Orlando might experience winds that are 10 mph greater than previously expected. That doesn't sound like much, "but 10 mph can actually make a fair amount of difference" when it comes to the amount of damage a home sustains, Ogaard says.
The year a home was built and the type of construction used also play key roles in how likely it is to sustain storm damage, according to the RMS model. Florida adopted extremely tough building codes after Hurricane Andrew walloped the state in 1992. Homes built in the wake of the new codes are constructed to much higher hurricane-resistance standards.
In contrast, "Texas building codes are not as robust," Ogaard says.
Homeowners insurance companies say it's too early to predict the new model's impact on insurance rates. Nationwide uses the RMS model, along with other models, to examine thousands of scenarios, such as a potential storm's path and its intensity.
The company also looks at historical trends to set future rates, says Nationwide spokeswoman Elizabeth Stelzer, adding, "I can't begin to speculate on its potential impact on rates."
Stephanie Siewert, vice president of sales and marketing at Prepared Insurance Co. in Tampa, Fla., says the revised model's impact on rates should become clear this fall and into 2012.
The new model's impact on rates may vary even within a state's own borders.
For example, different areas of Florida could see big differences, Ogaard says. Companies that primarily offer coverage in inland areas could push for steep homeowners insurance rate increases. On the other hand, insurers that cover homes in widespread parts of the state may be less likely to seek big rate increases.
While the RMS model is widely used, it's not the first one approved by the state that predicts greater inland damage inflicted by a hurricane, says Jack Nicholson, chief operating officer of the Florida Hurricane Catastrophe Fund and a member of the Florida Commission on Hurricane Loss Projection.
The cost of reinsurance also impacts homeowners insurance rates.
"To the extent the models require a company to purchase more or less reinsurance, it could have an impact on rates," Nicholson says.
Homeowners worried about rising insurance costs can take steps that both protect their home and possibly lower their rates.
Wind is the primary source of damage during a hurricane, so it's important to keep roofs, windows, doors and garage doors in place. If a roof is torn off, it also will allow rain to pour in.
There are several measures homeowners can take to combat this, such as using construction-grade adhesives to help hold roofs in place or reinforcing the gable ends of the roof.
Another low-cost alternative, Siewert says, is installing hurricane shutters to protect windows.
The Institute for Business & Home Safety, which is funded by insurance and reinsurance companies, has detailed information on its website about what homeowners can do to fortify their existing homes and be best prepared if a hurricane strikes.
Homes retrofitted to the IBHS's fortified building standards that have passed the organization's inspection are eligible to receive wind mitigation credits on the wind and hail premium portion of property insurance policies.
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