Assessment of hurricane risk and estimates of insured losses using catastrophe modeling

Recent hurricanes have created a crisis in the homeowner insurance market. There is great uncertainty about the nature of the risk and the potential losses for the state as well as the insurance and reinsurance industries, and rates have consequently increased dramatically. One way to reduce uncertainties and rationalize pricing is to use catastrophe models. This paper discusses how a public catastrophe model can be employed to assess hurricane risk and estimate potential losses. It presents a short description of the model structure and then proceeds to presents selected model results for residential properties in the state of Florida. It also presents scenario-based loss estimates for Category 1 and 5 hurricanes land-falling at two key locations in the state. The average annual insured loss for the combined personal and commercial residential properties in the state of Florida is estimated to be around $5.9 billion before deductibles. And a 100-year hurricane is expected to cost about $64 billion.