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By Lauren Comander
Tucked away in a building at FIU's Engineering Center stand 50 dedicated servers that run thousands of computations based on proprietary data. It's all in a day's work for Shahid Hamid, chair and professor of finance at FIU Business, and his interdisciplinary team. They are tasked with creating and maintaining the model that the State of Florida uses to regulate windstorm insurance rates, calculate mitigation discounts and affirm insurance company solvency.
Known today as Florida Public Hurricane Loss Model Version 8.1, the FIU-based model is the product of years of work by Hamid, the principal investigator and project manager, and his colleagues at FIU and across Florida universities and NOAA. When an insurance company wants to raise or lower premiums, it must seek approval from state regulators, who in turn rely on the model.
"State regulators don't want to fly blind – they want a benchmark to support their decisions, so they find it useful to use our model and keep giving us data," said Hamid, adding that the state's Office of Insurance Regulation provides the team about $1 million a year in grants.
Hamid's objective is to produce actuarially sound insurance rates that are fair to both homeowners and insurance companies. "This is research and a model FIU produces that has real impact on the citizens of Florida," Hamid said, noting that the model helps companies and regulators provide mitigation discounts that lower insurance rates. "It is something that affects their lives in some way, for better or worse."
"THIS IS RESEARCH AND A MODEL FIU PRODUCES THAT HAS REAL IMPACT ON THE CITIZENS OF FLORIDA."
Shahid Hamid
While factors like litigation expenses are outside of the model's purview, the model uses almost 60,000 years of simulated hurricanes and over 10,000 engineering vulnerability functions to estimate insurance companies' average annual loss from storms and justify the premiums. It then considers different mitigation factors to determine corresponding premium reductions.
While traditional actuarial models like the ones used for life and auto insurance draw on hundreds of thousands of claims to determine rates, a model for hurricanes has to get more creative. This so-called catastrophe model casts a wide net, based on all hurricanes land falling or bypassing Florida over the last century. The model considers factors like the hurricane's track, intensity, size, pressure, speed, and behavior, as well as the effect of terrain on wind gusts and types of buildings in its path. Because the model is based on past events and premiums are renewed annually, it does not consider forward-thinking issues like climate change. The goal is to determine how much it will cost insurance companies to rebuild, taking policy deductibles and limits into account.
For this, Hamid and his colleagues turn to the Wall of Wind (operated by the College of Engineering faculty and FIU's Extreme Events Institute) and test the effect of things like shutters, reinforced garage doors and various roof-wall connections. "Discounts have to be supported by data, and our model produces the data that allows the insurance companies to give discounts," Hamid said.
The model also calculates probable maximum loss (the worstcase scenario) to determine the reserves required to maintain solvency. Every summer, the state contracts Hamid to conduct a stress test on some 65 insurance companies by running simulations. While 95% pass the test, the companies that do not are required to add to their reserves and/or get additional reinsurance coverage.
The state realized it needed a catastrophe model after Hurricane Andrew in 1992, when premiums were based on just the previous five years of storm activity and underestimated the risk. The state convened a task force on catastrophe insurance and asked Hamid to serve as technical advisor. As the insurance market collapsed and Florida's liability grew, the state contracted Hamid to study the feasibility of merging two underwriting authorities into a new company now known as Citizens Insurance Corp.
In 2001, Florida commissioned a certified state-sponsored catastrophe model that would serve as a benchmark to support its regulation decisions. Having served for two years on the Florida Commission on Hurricane Loss Projection Methodology, which set standards for catastrophe models, Hamid understood what the model required and submitted a 40-page proposal. "UF and FSU tried to use their legislative powers to grab it, but we had by far the best proposal," he recalled.
Hamid built his team, keeping half of the work at FIU (including most of the computer science work) and subcontracting the rest to other Florida schools and NOAA. It took six years to build a model prototype and one year to earn certification.
The model was initially met with skepticism and hostility by insurance companies. "They thought the state was commissioning the insurance model to suppress insurance rates," he recalled. "But we were very scrupulous, and while the state funds us, it has no say in how the model works. We are not favoring homeowners or the insurance industry. We are just doing what the science tells us."
"WE ARE NOT FAVORING HOMEOWNERS OR THE INSURANCE INDUSTRY. WE ARE JUST DOING WHAT THE SCIENCE TELLS US"
Shahid Hamid
Nowadays, a number of insurance companies also use the model and it is the only nonprofit public model available. Every two years, most recently in June 2021, the model is recertified through an arduous multi-day interdisciplinary review process that involves running simulations and defending the model's construction and conclusions through cross-examination by meteorologists, statisticians, computer scientists, actuaries and engineers from the Florida Commission on Hurricane Loss Protection Methodology.
"We have to update the model because the standards change and new meteorology, building and insurance data comes in," Hamid said.
This year, homeowners in Florida are seeing their windstorm rates skyrocket by as much as 50%. Here, though, it is not so much the windstorm model driving the rates up, but primarily litigation costs from lawsuits against insurance companies, largely driven by assignment of benefits involving contractors and lawyers, according to Hamid.
"Assignment of benefit allows contractors to represent the homeowner and submit invoices to insurance companies on behalf of the homeowner, without homeowner input," Hamid said. "The contractors even get together with attorneys and file lawsuits without the homeowner being involved. Unfortunately, it has been abused dramatically in Florida, and there's an element of fraud involved."
In 2019, 76% of property claims lawsuits in the country were filed in Florida, yet only 8% of the claims were in Florida, Hamid said. Meantime, insurance companies paid $3 billion that year in legal expenses. The end result of all this, Hamid said: insurance companies are losing more than $1 billion a year in terms of business operations and underwriting (they do make money from investments). "They are passing on the cost of this litigation to homeowners," Hamid said.
The other factor driving the rate increases is the $29 billion in losses from hurricanes Irma in 2017 and Michael in 2018, with claims still being filed a few years later. With only 18% of Floridians carrying flood insurance, homeowners file lawsuits claiming their damage was not from rising water but instead a roof leak or other covered issue, resulting in increased litigation.
