Florida commission on hurricane loss projection methodology

1. 
   Describe the method(s) used to estimate annual loss costs and probable maximum loss levels. Identify any source documents used and any relevant research results.
   

2. 
   Identify the highest level of resolution for which loss costs and probable maximum loss levels can be provided. Identify all possible resolutions available for the reported output ranges.
   

3. 
   Describe how the model incorporates demand surge in the calculation of loss costs and probable maximum loss levels.
   

4. 
   Provide citations to published papers, if any, or modeling organization studies that were used to develop how the model estimates demand surge.
   

5. 
   Describe how economic inflation has been applied to past insurance experience to develop and validate loss costs and probable maximum loss levels.
   

1. 
   How the model handles expenses, risk load, investment income, premium reserves, taxes, assessments, profit margin, economic inflation, and any criteria other than direct property insurance claim payments will be reviewed.
   

2. 
   The method of determining probable maximum loss levels will be reviewed.
   

3. 
   The uncertainty in the probable maximum loss levels and the estimated annual loss costs will be reviewed.
   

4. 
   The data and methods used to incorporate individual aspects of demand surge on personal and commercial residential losses, inclusive of the effects from building material costs, labor costs, contents costs, and repair time will be reviewed.
   

5. 
   How the model accounts for economic inflation associated with past insurance experience will be reviewed.
   

6. 
   How the model accounts for flood and storm surge losses will be reviewed.
   

7. All referenced literature will be reviewed, in hard copy or electronic form, to determine applicability.

1. 
   The methods used in the development of mathematical distributions to reflect the effects of deductibles and policy limits shall be actuarially sound.
   

2. 
   The relationship among the modeled deductible loss costs shall be reasonable.
   

2. 
   Deductible loss costs shall be calculated in accordance with s. 627.701(5)(a), F.S.
   

Purpose: For a given windspeed and building type, losses may fall below the deductible or above the policy limit; and therefore, the distribution of losses is important.

1. 
   Describe the methods used in the model to treat deductibles (both flat and percentage), policy limits, and insurance-to-value criteria when projecting loss costs and probable maximum loss levels.
   

2. 
   Describe whether, and if so how, the model treats policy exclusions and loss settlement provisions.
   

3. 
   Provide an example of how insurer loss (loss net of deductibles) is calculated. Discuss data or documentation used to validate the method used by the model.
   

Example:

(A)		(B)	(C)	(D)=(A)*(C)	(E)=(D)-(B)
Building Value	Policy Limit	Deductible	Damage Ratio	Zero Deductible Loss	Loss Net of Deductible
100,000	90,000	500	2%	2,000	1,500

4. Describe how the model treats annual deductibles.

4. 
   Treatment of annual deductibles will be reviewed.
   

5. Justification for the changes from the previously accepted model in the relativities among corresponding deductible amounts for the same coverage will be reviewed.

1. 
   The methods, data, and assumptions used in the estimation of probable maximum loss levels shall be actuarially sound.
   

2. 
   Loss costs shall not exhibit an illogical relation to risk, nor shall loss costs exhibit a significant change when the underlying risk does not change significantly.
   

3. 
   Loss costs produced by the model shall be positive and non-zero for all valid Florida ZIP Codes.
   

4. 
   Loss costs cannot increase as the quality of construction type, materials and workmanship increases, all other factors held constant.
   

5. 
   Loss costs cannot increase as the presence of fixtures or construction techniques designed for hazard mitigation increases, all other factors held constant.
   

6. 
   Loss costs cannot increase as the wind resistant design provisions increase, all other factors held constant.
   

7. 
   Loss costs cannot increase as building code enforcement increases, all other factors held constant.
   

8. 
   Loss costs shall decrease as deductibles increase, all other factors held constant.
   

9. 
   The relationship of loss costs for individual coverages, (e.g., building, appurtenant structure, contents, and time element) shall be consistent with the coverages provided.
   

10. 
    Output ranges shall be logical for the type of risk being modeled and apparent deviations shall be justified.
    

11. 
    All other factors held constant, output ranges produced by the model shall in general reflect lower loss costs for:
    
    1. 
       masonry construction versus frame construction,
       
    2. 
       personal residential risk exposure versus manufactured home risk exposure,
       
    3. 
       inland counties versus coastal counties, and
       
    4. 
       northern counties versus southern counties.
       

12. 
    For loss cost and probable maximum loss level estimates derived from and validated with historical insured hurricane losses, the assumptions in the derivations concerning (1) construction characteristics, (2) policy provisions, (3) coinsurance, and (4) contractual provisions shall be appropriate based on the type of risk being modeled.
    

Purpose: This standard is to ensure that probable maximum loss levels are based on an actuarially sound methodology. The actuarial soundness resulting from compliance with the standard is particularly important to capital markets, insurers, reinsurers, and rating agencies that frequently use probable maximum loss levels.

Relevant Forms: G-5, Actuarial Standards Expert Certification

A-1, Zero Deductible Personal Residential Loss Costs by ZIP Code

A-2, Base Hurricane Storm Set Statewide Losses

A-3, 2004 Hurricane Season Losses

A-4, Output Ranges

A-5, Percentage Change in Output Ranges

A-6, Logical Relationship to Risk (Trade Secret item)

A-7, Percentage Change in Logical Relationship to Risk

A-8, Probable Maximum Loss for Florida

S-2, Examples of Loss Exceedance Estimates

S-5, Average Annual Zero Deductible Statewide Loss Costs –

Historical versus Modeled
Disclosures

1. 
   Provide a completed Form A-1, Zero Deductible Personal Residential Loss Costs by ZIP Code. Provide a link to the location of the form [insert hyperlink here].
   

2. 
   Provide a completed Form A-2, Base Hurricane Storm Set Statewide Losses. Provide a link to the location of the form [insert hyperlink here].
   

3. Provide a completed Form A-3, 2004 Hurricane Season Losses. Provide a link to the location of the form [insert hyperlink here].

6. Provide a completed Form A-7, Percentage Change in Logical Relationship to Risk. Provide a link to the location of the form [insert hyperlink here].

1. 
   The data and methods used for probable maximum loss levels for Form A-8, Probable Maximum Loss for Florida, will be reviewed. The hurricane associated with the Top Event will be reviewed.
   

2. 
   All referenced literature will be reviewed, in hard copy or electronic form, to determine applicability.
   

3. 
   Graphical representations of loss costs by ZIP Code and county will be reviewed.
   

4. 
   Color-coded maps depicting the effects of land friction on loss costs by ZIP Code will be reviewed.
   

5. 
   The procedures used by the modeling organization to verify the individual loss cost relationships will be reviewed. Methods (including any software) used in verifying Standard A-6 will be reviewed. Forms A-1, Zero Deductible Personal Residential Loss Costs by ZIP Code, A-2, Base Hurricane Storm Set Statewide Losses, A-3, 2004 Hurricane Season Losses, A-6, Logical Relationship to Risk (Trade Secret item), and A-7, Percentage Change in Logical Relationship to Risk, will be reviewed to assess coverage relationships.
   

6. The loss cost relationships among deductible, construction type, policy form, coverage, building code/enforcement, building strength, condo unit floor, number of stories, territory, and region will be reviewed.

10. Form A-4, Output Ranges, will be reviewed to ensure appropriate relativities among deductibles, coverages, and construction types.

Purpose: This form and the associated maps illustrate the range and variation by ZIP Code of zero deductible loss costs across Florida separately for frame, masonry, and manufactured homes.

1. 
   Provide three maps, color-coded by ZIP Code (with a minimum of six value ranges), displaying zero deductible personal residential loss costs per $1,000 of exposure for frame, masonry, and manufactured home.
   

2. 
   Create exposure sets for these exhibits by modeling all of the buildings from Notional Set 3 described in the file “NotionalInput15.xlsx” geocoded to each ZIP Code centroid in the state, as provided in the model. Provide the predominant County name and the Federal Information Processing Standards (FIPS) code associated with each ZIP Code centroid. Refer to the Notional Policy Specifications below for additional modeling information. Explain any assumptions, deviations, and differences from the prescribed exposure information.
   

3. 
   Provide, in the format given in the file named “2015FormA1.xlsx,” the underlying loss cost data rounded to three decimal places used for A. above in both Excel and PDF format. The file name shall include the abbreviated name of the modeling organization, the standards year, and the form name.
   

• 
  Replacement Cost included subject to Coverage A limit
  
• 
  Law and Ordinance not included
  

• 
  Replacement Cost included subject to Coverage B limit
  
• 
  Law and Ordinance not included
  

• 
  Replacement Cost included subject to Coverage C limit
  

• 
  Time limit = 12 months
  
• 
  Per diem = $150.00/day per policy, if used
  

Loss costs per $1,000 shall be related to the Coverage A limit

• 
  Replacement Cost included subject to Coverage A limit
  

• 
  Replacement Cost included subject to Coverage B limit
  

• 
  Replacement Cost included subject to Coverage C limit
  

• 
  Time limit = 12 months
  
• 
  Per diem = $150.00/day per policy, if used
  

Loss costs per $1,000 shall be related to the Coverage A limit

Purpose: This form illustrates the modeling organization’s ability to replicate reasonably historical hurricane losses for landfalling and by-passing Florida hurricanes.

1. 
   Provide the total insured loss and the dollar contribution to the average annual loss assuming zero deductible policies for individual historical hurricanes using the Florida Hurricane Catastrophe Fund’s aggregate personal and commercial residential exposure data found in the file named “hlpm2012c.exe.” The list of hurricanes in this form shall include all Florida and by-passing hurricanes in the modeling organization Base Hurricane Storm Set, as defined in Standard M-1, Base Hurricane Storm Set.
   

The table below contains the minimum number of hurricanes from HURDAT2 to be included in the Base Hurricane Storm Set, based on the 115-year period 1900-2014. Each hurricane has been assigned an ID number. As defined in Standard M-1, Base Hurricane Storm Set, the Base Hurricane Storm Set for the modeling organization may exclude hurricanes that had zero modeled impact, or it may include additional hurricanes when there is clear justification for the additions. For hurricanes in the table below resulting in zero loss, the table entry shall be left blank. Additional hurricanes included in the model’s Base Hurricane Storm Set shall be added to the table below in order of year and assigned an intermediate ID number as the hurricane falls within the bounding ID numbers.

Note: Total dollar contributions should agree with the total average annual zero deductible statewide loss costs provided in Form S-5, Average Annual Zero Deductible Statewide Loss Costs – Historical versus Modeled.

Purpose: This form illustrates the modeling organization’s ability to replicate reasonably historical hurricane losses for the four Florida landfalling hurricanes in 2004.

1. 
   Provide the percentage of residential zero deductible losses, rounded to four decimal places, and the monetary contribution from Hurricane Charley (2004), Hurricane Frances (2004), Hurricane Ivan (2004), and Hurricane Jeanne (2004) for each affected ZIP Code, individually and in total. Include all ZIP Codes where losses are equal to or greater than $500,000.
   

Use the 2012 Florida Hurricane Catastrophe Fund’s aggregate personal and commercial residential exposure data found in the file named “hlpm2012c.exe.”

Light Red 2% to 5%

Pink 1% to 2%

Light Pink 0.5% to 1%

Light Blue 0.2% to 0.5%

Medium Blue 0.1% to 0.2%

Blue Below 0.1%
Plot the relevant storm track on each map.
C. Provide this form in Excel format. The file name shall include the abbreviated name of the modeling organization, the standards year, and the form name. Also include Form A-3, 2004 Hurricane Season Losses, in a submission appendix.

	Hurricane Charley		Hurricane Frances		Hurricane Ivan		Hurricane Jeanne		Total
ZIP Code	Personal & Commercial Residential Monetary Contribution ($)	Percent of Losses (%)	Personal & Commercial Residential Monetary Contribution ($)	Percent of Losses (%)	Personal & Commercial Residential Monetary Contribution ($)	Percent of Losses (%)	Personal & Commercial Residential Monetary Contribution ($)	Percent of Losses (%)	Personal & Commercial Residential Monetary Contribution ($)	Percent of Losses (%)

Form A-4: Output Ranges

Purpose: This form provides an illustration of the projected personal and commercial residential modeled loss costs by county and provides a means to review for appropriate differentials among deductibles, coverages, and construction types.

4. 
   If a modeling organization does not have loss costs for a ZIP Code for which there is some exposure, do not assume such loss costs are zero, but use only the exposures for which there are loss costs in calculating the weighted average loss costs. Provide a list in the submission document of the ZIP Codes where this occurs.
   

5. 
   NA shall be used in cells to signify no exposure.
   

F. All anomalies in loss costs that are not consistent with the requirements of Standard A-6, Loss Outputs and Logical Relationships to Risk, and have been explained in Disclosure A-6.12 shall be shaded.

• 
  Coverage A limit = $100,000
  
• 
  Replacement Cost included subject to Coverage A limit
  
• 
  Law and Ordinance not included
  

• 
  Coverage B limit = 10% of Coverage A limit
  
• 
  Replacement Cost included subject to Coverage B limit
  
• 
  Law and Ordinance not included
  

• 
  Coverage C limit = 50% of Coverage A limit
  
• 
  Replacement Cost included subject to Coverage C limit
  

• 
  Coverage D limit = 20% of Coverage A limit
  
• 
  Time limit = 12 months
  
• 
  Per diem = $150.00/day per policy, if used
  

• 
  Dominant Coverage = A
  
• 
  Loss costs per $1,000 shall be related to the Coverage A limit
  
• 
  Loss costs for the various specified deductibles shall be determined based on annual deductibles
  
• 
  2% Deductible of Coverage A
  
• 
  All-other perils deductible = $500
  

• 
  Coverage C limit = $25,000
  
• 
  Replacement Cost included subject to Coverage C limit
  

• 
  Coverage D limit = 40% of Coverage C limit
  
• 
  Time limit = 12 months
  
• 
  Per diem = $150.00/day per policy, if used
  

• 
  Dominate Coverage = C
  
• 
  Loss costs per $1,000 shall be related to the Coverage C limit
  
• 
  Loss costs for the various specified deductibles shall be determined based on annual deductibles
  
• 
  2% Deductible of Coverage C
  
• 
  All-other perils deductible = $500
  

• 
  Coverage A limit = 10% of Coverage C limit
  
• 
  Replacement Cost included subject to Coverage A limit
  

• 
  Coverage C limit = $50,000
  
• 
  Replacement Cost included subject to Coverage C limit
  

• 
  Coverage D limit = 40% of Coverage C limit
  
• 
  Time limit = 12 months
  
• 
  Per diem = $150.00/day per policy, if used
  

• 
  Dominant Coverage = C
  
• 
  Loss costs per $1,000 shall be related to the Coverage C limit
  
• 
  Loss costs for the various specified deductibles shall be determined based on annual deductibles
  
• 
  2% Deductible of Coverage C
  
• 
  All-other perils deductible = $500
  

• 
  Coverage A limit = $50,000
  
• 
  Replacement Cost included subject to Coverage A limit
  

• 
  Coverage B limit = 10% of Coverage A limit
  
• 
  Replacement Cost included subject to Coverage B limit
  

• 
  Coverage C limit = 50% of Coverage A limit
  
• 
  Replacement Cost included subject to Coverage C limit
  

• 
  Coverage D limit = 20% of Coverage A limit
  
• 
  Time limit = 12 months
  
• 
  Per diem = $150.00/day per policy, if used
  

• 
  Dominant Coverage = A
  
• 
  Loss costs per $1,000 shall be related to the Coverage A limit
  
• 
  Loss costs for the various specified deductibles shall be determined based on annual deductibles
  
• 
  2% Deductible of Coverage A
  
• 
  All-other perils deductible = $500
  

• 
  Coverage A limit = $750,000
  
• 
  Replacement Cost included subject to Coverage A limit
  

• 
  Coverage C limit = 5% of Coverage A limit
  
• 
  Replacement Cost included subject to Coverage C limit
  

• 
  Coverage D limit = 20% of Coverage A limit
  
• 
  Time limit = 12 months
  
• 
  Per diem = $150.00/day per policy, if used
  

• 
  Dominant Coverage = A
  
• 
  Loss costs per $1,000 shall be related to the Coverage A limit
  
• 
  Loss costs for the various specified deductibles shall be determined based on annual deductibles
  
• 
  3% Deductible of Coverage A
  
• 
  All-other perils deductible = $500
  

Purpose: This form illustrates the impact of changes in the model on the loss cost output ranges from the previously accepted model.

• 
  Statewide (overall percentage change),
  
• 
  By region, as defined in Figure 14 – North, Central and South,
  
• 
  By county, as defined in Figure 15 – Coastal and Inland.
  

B. Provide this form in Excel format. The file name shall include the abbreviated name of the modeling organization, the standards year, and the form name. Also include all tables in Form A-5, Percentage Change in Output Ranges, in a submission appendix.