A story in today's Wall Street Journal addressed the controversial application of predictive catastrophe modeling for rating. The pieced raised many of same questions addressed in our coverage last year of the growing controversy of the use of certain models in the Florida property insurance market: How scientific are the models, or at least their application? Are the models' assumptions chosen to benefit the insurance industry unfairly at the expense of residents of Florida and other states? Is the fundamental science about the effects of rising sea surface temperatures too uncertain to be built into predictive formulae?

Without examining the models at a very technical level, it's hard not to conclude that the parties on either side of the controversy simply seek to allow models to be run using assumptions that favor their interest. The story alludes to the arguments of, on the one hand, residents who face prohibitive premiums and, on the other hand, insurers who appear to act on the maxim "you can never be too careful."

One scientist is cited as saying that some of the CAT models fail to take into account "scientific uncertainty" and thus can be overreaching in their conclusions. Seems reasonable, but surely saying that insurers can't charge for losses they can't be more sure of is asking them to bear the costs of uncertainty.

Nobody should have to pay more insurance premium than necessary but how accurately can one calculate what's necessary from a natural catastrophe point of view? Not accurately enough, judging by this year's performance. The Journal would have done well to reference an article from the previous day (Property Insurers Confront Rising Catastrophe Losses) which acknowledges that the losses in the first half of the year have eaten up premium, leaving carriers at the break-even point before the Atlantic hurricane season has even begun. Costs are still being calculated from the Mississippi River Basin floods, and the West Coast is in the midst of the latest round of wildfires — with nearly the entire summer still ahead.

It may be too much to expect the public to understand the hard/soft market cycle but one would think that the public might start to take a more rational view of risk when viewed in the context of climate change. Perhaps the CAT model vendors should seek an endorsement from Al Gore…

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