Setting insurance rates by looking to the past to predict the future doesn’t make sense with increasing environmental uncertainties, argues the California insurance industry.
Ry Rivard reports that insurance companies in California are arguing that the "new normal" of climate change is altering the insurance landscape. "Near the top of the industry’s wish list is a wonky request: Let insurers set premiums based on the risk of fires that could burn someday soon."
The current approach is to use past losses to predict future ones. But many of the most catastrophic events have happened fairly recently and the frequency and severity of disasters will likely increase in the future. “Since the 1980s, insurers have used increasingly sophisticated computer models to prepare for hurricanes and earthquakes. The California Earthquake Authority, a government-run insurer, uses catastrophe models to set rates, as does a similar effort in Florida to provide hurricane insurance,” writes Rivard.
Critics say that allowing insurers to set rates based on catastrophe models would limit transparency, and they contend that the models do not accurately predict future risks, notes Rivard. "Regulators worry the models aren’t credible, and that they’re a 'black box' and could be used to overcharge consumers."
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