Florida Commission on Hurricane Loss Projection Methodology · 6/21/2007 · Presentation to . Florida Commission on Hurricane Loss Projection Methodology. ... roughness upstream

Bringing Science to the Art of Underwriting™TM

RMS® U.S. Hurricane Model v6.0a

Presentation to

Florida Commission on Hurricane Loss Projection Methodology

June 21, 2007

2CONFIDENTIAL© 2007 Risk Management Solutions, Inc.TM

Presentation Overview

Hurricane model component overview

Discussion of changes to model components

Overview of changes in output ranges


BasinBasin--wide track wide track a pa amet r and parameter simulation and simulation and calibrationcalibrationPressure history Pressure history simulation and simulation and calibration calibration Importance Importance sampling of sampling of simulated trackssimulated tracks

TimeTime--stepping wind stepping wind f el calcula i of field calculation of overover--water gradient water gradient windwindDirectional factors Directional factors for surface for surface roughness upstream roughness upstream of overof over--land locationland locationVariable Resolution Variable Resolution Grid data resolutionGrid data resolution

Engineering model Engineering model ca ib ated i h calibrated with historical claimshistorical claimsOver 50 vulnerability Over 500 vulnerability classes based on classes based on material, height, material, height, occupancy, and year occupancy, and year builtbuiltMitigation measuresMitigation measures

Overview of the Hurricane Model Methodology

al ul e Calculate D eDamage

D ine Define H icaneHurricane

A sess Assess Wi d peedWind speed

LLOOSSSS


Changes in the ModelHazard

– No changes

Vulnerability

– Incorporation of Post-event Loss Amplification (PLA) (7% increase in statewide level loss costs).

– Introduction of vulnerability functions for single family residential occupancies that vary with square footage of property (no change in statewide loss costs)

– Changes to some secondary modifiers (no change in statewide losscosts)• The software has been configured to make secondary modifiers inactive when

any of the primary variables (construction, occupancy, number of stories and year built) are not present

• Introduction of a new modifier for the Fortified…for Safer LivingTM program for new wood and masonry residential single family buildings

• Minor adjustments to Foundation modifier for wood frame buildings

• Introduction of a carport/screen enclosure modifier for manufactured homes


Basin-Wide Hurricane Track Set Simulation

Use random-walk model to simulate storm track– Calibrate model over water based on historic crossings in 2°x2°

cells– Calibrate model at coastline based on historic crossing rates and

forward speed distributions along linear coastal segments


Pressure History Model for Each Track

Use random-walk model to add pressure histories along length of each simulated track

– Overland filling rates follow functional form of Kaplan and DeMaria (1995)

– Minimum pressures constrained by sea surface temperature

– Calibrate model at coastline based on historic pressure distributions along linear coastal segments


Importance Sampling of Simulated Storms

100,000 years of hurricane activity for Florida is reduced to 19,047 events

Total rate of occurrence in model equals observed mean annual rate of occurrence of historic storms

Rates include observed hurricane activity through 2005


Wind Field Calculation Over Water

Based on the work of Georgiou (1983; 1985), the model calculates the gradient wind field

Wind field at 10 m height is calculated as a function of the gradient wind speed

Rmax Distribution

– RMAX modeled as a lognormal distribution

– Used HRD/AOML H*Wind Data for recent storms and updated the Mean and Standard Deviation coefficients within the Rmax distribution


Estimation of Over Land Peak Gust Wind Speed

Creation of a database describing the land surface in terms of roughness length using:– National Land Cover Data dataset produced by the United

States Geological Survey (based on mid-1990s Landsat Thematic Mapper satellite data)

– Advanced Spaceborne Thermal Emission and Reflection Radiometer (ASTER) satellite imagery to ensure the timeliness of the data

Representative roughness length is assigned to each land-cover class

Coefficients describing the impact of land friction are calculated by sampling the roughness lengths for local and upstream conditions based on the direction of the wind


Sampling Surface Roughness

#

#

South MiamiSouth Miami


Variable Resolution Grid

Variable Resolution Grid (VRG) makes it possible to model wind at a higher resolution than ZIP Code

Highest resolution cells are in areas of high exposure (major metropolitan areas) and high hazard gradient (e.g., coastal regions)

Miami: ZIP Code vs. VRG cell sizes


Vulnerability Methodology

Over 500 base curves (including residential and commercial lines) developed separately for building and contents based on a combination of:– Construction class

– Occupancy

– Building height

– Year Built

– Square footage

Additional Living Expenses (ALE) are a function of building damage and occupancy


Building specific attributes or mitigation measures– Modeled by scaling vulnerability functions up or

down from the unknown vulnerability curve

Secondary Modifier Methodology

00

10

2020

3030

40

5050

6060

7070 l er ilBasic vulnerability

Modified vulnerabilityModified vulnerability

od vuln ab ityModified vulnerability

MD

R (

)M

DR

(%)

Wind speed (mph)Wind speed (mph)50 180


Change in Loss by County (All Policy Forms)

County Change in Zero Deductible Loss Cost*

SARASOTA 10.44%

MANATEE 12.36%

HILLSBOROUGH 12.28%

PINELLAS 13.58%

PASCO 11.71%

HERNANDO 10.36%

MARTIN 10.27%

MIAMI-DADE 13.60%

PALM BEACH 13.47%

BROWARD 15.21%

Statewide +7.01%


Form A-8 : Percent Change in Output Ranges by County (Owners Frame)

Owners Frame % ChangeWeighted Average Loss Costs2% Deductible

Less than 5%

5 to 10%

10 to 15%

Greater than 15%

Bringing Science to the Art of Underwriting™TM

Compliance with2006 Standards

Presentation to

Florida Commission on Hurricane Loss Projection Methodology

June 21, 2007


General Standards


Standard G-1: Scope of the Computer Model and its Implementation

Model version number: RiskLink 6.0a

– Updated from RiskLink 5.1a in 2005 submission

Concise technical description of the model provided in the 2006 submission document

– Description of Post Event Loss Amplification (PLA)

– Introduction of Square foot vulnerability functions

– Minor changes to secondary modifiers


Standard G-1: Scope of the Computer Model and its Implementation (2)

Flow diagram illustrating interactions among major model components

– No material changes in component interactions

Pertinent references were consolidated, expanded, and arranged by standard grouping

Added description of all major components of the model that have changed

Other aspects of this standard remain unchanged from v5.1a


Standard G-2: Qualifications of Modeler Personnel and Independent Experts

Employee/client statistics and biographies updated

Professional credentials updated to include reflect changes the model team or in employment status, and relevance to the previous or latest model generation

– Project and/or employment departures: Richard Dixon, Uday Eyunni, Sergio Gomez, Prasad Gunturi, Surya Gunturi, and Jason Lin

– Additions to project: Shobana Azariah, Kay Cleary, Kimberley Court, Joshua Darr, Thomas Foster, Mitch Sattler, Christine Wallinger, Yen-Tin Yang, and Ying-Jen Yen


Standard G-2: Qualifications of Modeler Personnel and Independent Experts (2)

Relevant reviews have been cited and have not changed since the prior submission

Forms G1-G6 on Expert Certification updated with each revision cycle

Other aspects of this standard remain unchanged from v5.1a


Standard G-3: Risk Location

ZIP Code data provided by a third-party developer and is of an August 2005 United States Postal Service vintage

The RMS model does not use ZIP-Code centroids as proxies for exposure. If a building location is entered as a ZIP Code, then the model uses wind speeds that are exposure weighted averages of wind speeds across the ZIP-Code extent, based on population data.

ZIP-Code information is examined by RMS for consistency and is subject to standardized quality control testing and checking by experts employed by RMS for that purpose.


Standard G-4: Independence of Model Components

RMS’ response to this standard remains unchanged from v5.1a

The vulnerability, meteorological, and actuarial model components are theoretically sound and have each thoroughly and independently tested and calibrated

They have also been tested in an integrated way to ensure that the relationships between the components are reasonable


Meteorological Standards


Standard M-1: Base Hurricane Storm Set

All aspects of RMS’ response to this standard remains unchanged from last year’s submission

“The hurricane set used to develop the RMS U.S. Hurricane model for Florida includes both landfalling and by-passing hurricanes that produce losses in Florida. The hurricane set used by RMS matches the Official Storm Set provided by the Commission.”

11© 2007 Risk Manage TM

Standard M-2: Hurricane CharacteristicsUpdated response to disclosure M-2.1:

Provided response to (new) disclosure M-2.10

• Pressure Profile Parameter and Gradient to Surface Reduction Factors – developed using the H*Wind data for the period 1998-2001.

• Radius to Maximum Wind – developed using a combination of the Extended Best Track data (Mark DeMaria) from 1988-2000, H*Wind data from 2000-2005, and also data from NWS 23 & 38.

• Central Pressure and Forward Speed – developed using the National Hurricane Center HURDAT as of June 1, 2006 with updates for the 2005 hurricane season obtained from the National Hurricane Center’s in-season advisories and track databases, NWS 23 & 38 and supplemented by National Hurricane Center storm reports.


Standard M-2: Hurricane Characteristics

All other aspects of RMS’ response remain unchanged from last year’s submission

“Each of the methods for depicting hurricane characteristics in the RMS U.S. Hurricane model is based on currently accepted scientific literature or RMS information previously accepted by the FCHLPM.”


Standard M-3: Landfall Intensity

All aspects of RMS’ response to this standard remain unchanged from last year’s submission

“The maximum wind speeds produced by the model per hurricane category are consistent with the Saffir-Simpson Scale.”


Standard M-4: Hurricane Probabilities

All aspects of RMS’ response to this standard remains unchanged from last year’s submission

“Modeled probability distributions for hurricane intensity, forward speed, radii for maximum winds and landfall angle are consistent with observed historical hurricanes in the Atlantic basin. The basis for developing probability distributions for each of these parameters is the record of historical hurricanes”


Standard M-5: Land Friction and Weakening

Updated figure 9. for RL 6.0a (includes 2005 storms: Dennis, Katrina, Wilma)

Response to (new) disclosure M-5.6 – plots of HU Charley using the RMS fastest and slowest filling rates (figures 10 and 11) & new table of comparison of modeled windspeeds to observations (table 9)

Other aspects of land friction in this standard remain unchanged from last year’s submission


Standard M-6: Logical Relationships of Hurricane Characteristics

All aspects of this standard remain unchanged from last year’s submission

The magnitude of asymmetry increases with increasing translational speeds, all other factors being held constant.

The wind speeds decrease with increasing surface roughness, all other factors held constant.


Vulnerability Standards


Standard V-1: Derivation of Vulnerability Functions

A - Vulnerability functions are based on well-supported structural and wind engineering principles and detailed analyses of historical claims data

– Introduction of SQFT versions of vulnerability functions for single family residential risks

– No change for portfolios with unknown SQFT information


Vulnerability – Square Footage - Residential

Peak Gust (mph)

MD

R

<1500 sq.ft.1500-2000 sq.ft. 2000-4500 sq.ft.4500+ sq.ft.

Small1500 SF100 $/SF$150 k

10% MDR$15k loss

Large- (5.0)4500 SF120 $/SF$675 k

10% MDR$67.5k loss

Living AreaCost /SFExposureMDRLoss

Large-(6.0)4500 SF120 $/SF$675 k

5% MDR$33.7k loss

Claims data showed lower loss ratios for larger homes


Impact of Square Footage on MDR

Related to the physics of the loading mechanism

– High suction zones are “fixed” by flow mechanism

– Similar damage divided by large exposure = smaller damage ratios

V (t)V (t)α (α (tt))

Larger homes tend to have higher quality materials / workmanship


0.00

0.20

0.40

0.60

0.80

1.00

1.20

<1500 1500-2000 2000-4500 >4500

SQFT Range

Rat

io t

o U

nkno

wn

SQFT

(def

ault

) <1500

1500-2000

2000-4500

>4500

Impact on AAL at a single location

Impact of Individual SQFT bands

2 smallest bands increase losses relative to default

2 largest bands decrease relative to default



B – Methods used to derive vulnerability functions are theoretically sound

– A detailed description of the vulnerability update was presentedto the Professional Team, including a review of the data utilized in the update, and how the data was processed and used in the derivation of the updated vulnerability curves.

C – Secondary Modifiers to Vulnerability functions based on engineering understanding, damage statistics, building codes, engineering studies, wind tunnel experiments



D – Construction types and Primary Characteristics

– Over 500 functions per region for all occupancies

– 178 unique residential Building functions per region



E – Changes in building codes/construction practices are modelled through separate vulnerability functions for three year bands

F – Separate vulnerability functions

– Derived for structures and mobile homes,

– Appurtenant structures use same function as main structure, but can be input separately

– Separate functions for contents, ALE

G – Minimum wind speed generates damage

– 50 mph peak gust

– ~42 mph one minute sustained

Form V-1 has been submitted and reflects changes to the vulnerability functions


Standard V-2: Mitigation Measures

The following secondary modifiers are available in the model:

– Roof sheathing strength

– Roof covering

– Roof anchor

– Foundation system

– Wind resistance of window openings

– Wind resistance of door openings

– Roof geometry

– Opening protection (shutters)

The application of modifier options are reasonable when applied individually and in combination as shown in Form V2/V3

– Reviewed onsite and in closed meeting


Actuarial Standards


Standard A-1: Modeled Loss Costs

The track and pressure of each tropical cyclone are modeled throughout its lifetime in the Atlantic basin from genesis to decay.

For the purposes of calculating losses, a storm is first considered when maximum winds reach Category 1 and damage is caused in Florida.

From that point on wind speeds and losses are calculated regardless of whether maximum winds are greater than or less than Category 1.


Standard A-2: Underwriting Assumptions

RMS uses historical loss information in the development of vulnerability functions– Adjustments, edits, inclusions, or deletions to insurance company

input are based on accepted actuarial, underwriting, and statistical procedures and are documented in writing

– The vulnerability of property observed in historical events is assumed to be indicative of vulnerability of such property in future events where subjected to similar wind loads


Standard A-3: Loss Cost Projections

RMS loss cost calculations do not include expense, risk load, investment income, premium reserves, taxes, assessments, or profit margins.

RMS loss cost projections do not make any prospective provision for economic inflation.


RMS quantifies the economic, social, and operational factors following a major catastrophic event that cause claim costs to exceed normal costs using a methodology called Post-event Loss Amplification.

The treatment of demand surge is based on data, methods and assumptions that are actuarially sound.

Standard A-4: Demand Surge


Standard A-5: User Inputs

Input data to the RMS hurricane model is explicitly provided by the user for each particular analysis.

The model assumes that inputs provided by the user are reflective of actual exposures.


Standard A-6: Logical Relationship to Risk

Loss costs do not display an illogical relation to risk, nor do they vary significantly when the underlying risk does not change significantly

Loss costs are positive and non-zero for all Florida ZIP Codes

Loss costs do not increase as roughness increases

Loss costs– do not increase as quality increases, all other factors held constant

– decrease as deductibles increase

– exhibit relationships between coverages and loss costs for each coverage that are consistent and reasonable


Standard A-7: Deductibles and Policy Limits

The methods used in the development of mathematical distributions to reflect the effects of deductibles and policy limits are actuarially sound.

The relationship among the modeled deductible loss costs is reasonable.

Deductible loss costs are calculated in accordance with s. 627.701(5)(a), F.S.


Standard A-8: Contents

Contents and structure loss relativities are based on an analysis of historical claims data

The relationships between structures and contents losses are reasonable


Standard A-9: Additional Living Expenses (ALE)

The methods used in the development of Additional Living Expense (ALE) loss costs are actuarially sound

ALE loss cost derivations consider the estimated time required to repair or replace the property

The relationship between modeled structure and ALE losses is based on an analysis of historical claims data and is reasonable

ALE loss costs produced by the model are based on analysis of historical claims data and appropriately consider ALE claims arising from damage to the infrastructure


Standard A-10: Output Ranges

Output Ranges are logical.

All other factors held constant, output ranges produced by the model reflect lower loss costs for– Masonry construction versus Frame construction

– Residential risk exposure versus Mobile home risk exposure

– Inland counties versus Coastal counties

– Northern counties versus Southern counties

Loss costs are consistent with the requirements of this Standard with no anomalies.


Standard A-10: Output Ranges

Differences in the output ranges from RMS’s Version 5.1a submission are reasonable and driven by the incorporation of Post-event Loss Amplification (7% increase in statewide level loss costs)


Statistical Standards


Standard S-1: Modeled Results and Goodness of Fit

We have updated the charts showing an assessment of uncertainty in loss costs for output ranges.

Other aspects of this standard remain unchanged from v5.1a.

RMS uses empirical methods in model development and implementation to match stochastic storm generation to historic data, which is supported by currently accepted scientific literature. The chosen distributions have been shown to have reasonable agreement with the historic data.


Standard S-2: Sensitivity Analysis for Model Output

We have updated the charts that were shown last year to include demand surge.


RMS has assessed the sensitivity of temporal and spatial outputswith respect to the simultaneous variation of input variables using currently accepted scientific and statistical methods. No actions resulted from this analysis.


Standard S-3: Uncertainty Analysis for Model Output

We have updated the charts that were shown last year to include demand surge.


RMS has performed an uncertainty analysis on the temporal and spatial outputs of the model using currently accepted scientificand statistical methods. No action resulted from this analysis.


Standard S-4: County Level Aggregation

We have updated the analysis that was done last year.

The standard error of each output range at the county level of aggregation is less than 2.5% of the loss cost estimate.


Standard S-5: Replication of Known Hurricane Losses

We have added comparisons between observed and modeled losses for the 2005 hurricanes.

We have added comparisons with FL-OIR estimates of the losses.

We have included demand surge in the modeled results.

Form S-3 has been updated to include demand surge in both observed and modeled losses.


The RMS model is able to reliably and without significant bias reproduce incurred losses on a large body of past hurricanes, both for personal residential and mobile homes.


Standard S-6: Comparison of Projected Hurricane Loss Costs

The difference between historical and modeled annual average statewide loss costs are reasonable, by established statistical expectations and norms.

Form S-4 has been updated to include demand surge.


Computer Standards


Standard C-1: Documentation

Computer Standards document binder– On-line, in central location

– Folder hierarchy indexes material by standard

– Covers all software relevant to submission

– Includes documentation external to source code

Binder updated for RiskLink 6.0a to reflect:– Model updates

– Improvements in development processes


Standard C-2: Requirements

Requirements covered in various documents, e.g:– RiskLink System Administration and User Guide

– Coding standards

– Market requirements documents

– Functional specifications

– Project management documents

– Visual SourceSafe documents

– Information Technology Security documents

– Quality Assurance test plans

– Training program documents

Changes in modeling approaches, e.g. loss amplification and use of square footage in vulnerability functions, reflected in requirements documents


Standard C-3: Model Architecture and Component Design

Control flow diagrams– Illustrate key processes, branches, and loops within software

Data flow diagrams– Illustrate data-dependency relationships between software

components

Interface specifications– Document software module inputs and outputs

Data schema documentation– Describes all data files / databases

Change in modeling approaches for version 6.0a reflected in these documents


Standard C-4: Implementation

Coding guidelines contain standards for software and data development

Data procedures documented

Flow diagrams can be traced to code level

Count of lines of code and comment lines maintained for all components

Comments within code allow components to be comprehensible

Implementation of new functionality (e.g. square footage) and unchanged functionality (e.g. annual deductible) reviewed by Professional Team


Standard C-5: Verification (1/3)

Procedures for general testing– Design and prototype of model modifications/additions

– Written specifications describe purpose, algorithm, and testing plans; reviewed by modelers, software engineers, and QA

– Independent execution of test plans by RMS Software and Engineering Quality Assurance departments

– Code inspections, reviews, and walkthroughs to verify code correctness

– Run time errors caught by logical assertions, exception handling mechanisms, and trace statements in code



Procedures for component testing– IBM/Rational Enterprise tools used for analyzing

and testing all components

– Software debuggers used to verify execution paths and calculation results

– Custom unit tests used to check components using range of input values

– Aggregation tests performed by running the product as complete package to check all the components and data files accessed by model

– Performance tests check for execution time and memory use problems



Procedures for data testing

– Software tools used

• Database packages

• Mapping software

• Rational Robot “regression tests”

• Custom tools (e.g. in Excel, Access, C++)

– Aggregation tests check use of data files, and to check repeatability of results with same input


Standard C-6: Model Maintenance and Revision

Comprehensive procedures for full life cycle– Summarized by High-Level Description of Model-

Revision Policy

– Elaborated upon in Detailed Description of Model-Revision Policy

Unique model version number used for each release of model

Software and processes used to track errors, revisions


Standard C-7: Security

RMS documents and implements security procedures for access to code, data, and documentation

– Security requirements documented and enforced by RMS Legal and Information Technology Departments

– Company personnel are trained in security requirements and procedures as part of the company’s ongoing training process

Documents

Florida Commission on Hurricane Loss Projection Methodology · 6/21/2007 · Presentation to . Florida Commission on Hurricane Loss Projection Methodology. ... roughness upstream