Hurricane Katrina extracted a terrifying toll -- 1,200 dead, a premier American city in ruins, and the nation in shock. Insured losses would ultimately cost the property insurance industry $40 billion.
But Katrina did not tear a hole in the financial structure of America's property insurance system as large as the one carved scarcely six weeks later by a largely unknown company called Risk Management Solutions.
RMS, a multimillion-dollar company that helps insurers estimate hurricane losses and other risks, brought four hand-picked scientists together in a Bermuda hotel room.
There, on a Saturday in October 2005, the company gathered the justification it needed to rewrite hurricane risk. Instead of using 120 years of history to calculate the average number of storms each year, RMS used the scientists' work as the basis for a new crystal ball, a computer model that would estimate storms for the next five years.
The change created an $82 billion gap between the money insurers had and what they needed, a hole they spent the next five years trying to fill with rate increases and policy cancellations.
RMS said the change that drove Florida property insurance bills to record highs was based on "scientific consensus."
The reality was quite different.
Today, two of the four scientists present that day no longer support the hurricane estimates they helped generate. Neither do two other scientists involved in later revisions. One says that monkeys could do as well.
In the rush to deploy a new, higher number, they say, the industry skipped the rigors of scientific method. It ignored contradictory evidence and dissent, and created penalties for those who did not do likewise. The industry flouted regulators who called the work biased, the methods ungrounded and the new computer model illegal.
Florida homeowners would have paid more even without RMS' new model. Katrina convinced the industry that hurricanes were getting bigger and more frequent. But it was RMS that first put a number to the increased danger and came up with a model to justify it.
Long time readers of The Iconic Midwest might remember that I took these RMS people to task almost four years ago (!) for this work. I wrote:
Insurance companies are now using the threat of global warming to rip its customers off. Evidently a group called Risk Management Solutions (RMS) supplies the models insurance companies use to get an idea of what their risks and liabilities are in hurricane prone areas. Well, last spring threw out its old models based upon 100 years worth of empirical evidence in favor of a guess; a guess real life hurricane experts call "actually unscientific."
Those guesses have not only been unscientific, but they have been spectacularly wrong:
The new RMS model called for at least 11 hurricanes to come ashore in the United States by the end of 2010, most of them aimed at Florida.
Four hurricanes struck the U.S. None hit the Sunshine State.
RMS stands by its five-year outlook and contends that the risk of hurricanes remains higher than normal. Company officials last week said they would continue to adjust their model as needed, but a single five-year lull does not disprove their results.
Yet a growing number of experts now wonder if the changes spurred by RMS -- and the accompanying spike in insurance premiums -- were justified.
The woman credited with launching the industry of hurricane modeling questions how near-term models were introduced. She accuses RMS of overselling software that lacked sufficient scientific support, and says insurers accepted the output of that model as if it were fact.
"I've never seen the industry so much just hanging on what a handful of scientists or one model would say," said Karen Clark, founder and former CEO of AIR Worldwide, an RMS competitor.
"They're just tools," Clark said.
"They're models.
"They're wrong."
The details on how the "model" was created in the first place are fascinating in that they really seem to indicate fraud on the part of RMS:
The daily papers were still blaring news about Katrina when Jim Elsner received an invitation to stay over a day in Bermuda.
The hurricane expert from Florida State University would be on the island in October for an insurance-sponsored conference on climate change. One of the sponsors, a California-based company called RMS, wanted a private discussion with him and three other attendees.
Their task: Reach consensus on how global weather patterns had changed hurricane activity.
The experts pulled aside by RMS were far from representative of the divided field of tropical cyclone science. They belonged to a camp that believed hurricane activity was on the rise and, key to RMS, shared the contested belief that computer models could accurately predict the change.
Elsner's statistical work on hurricanes and climatology included a model to predict hurricane activity six months in advance, a tool for selling catastrophe bonds and other products to investors.
There was also Tom Knutson, the National Oceanic and Atmospheric Administration meteorologist whose research linking rising carbon dioxide levels to potential storm damage had led to censoring by the Bush White House.
Joining them was British climate physicist Mark Saunders, who argued that insurers could use model predictions from his insurance-industry-funded center to increase profits 30 percent.
The rock star in the room was Kerry Emanuel, the oracle of climate change from the Massachusetts Institute of Technology. Just two weeks before Katrina, one of the world's leading scientific journals had published Emanuel's concise but frightening paper claiming humanity had changed the weather and doubled the damage potential of cyclones worldwide.
Ah yes, Kerry Emanuel...what are the chances he would have been involved in the RMS debacle? Based upon the tenor of his work (which I have discussed before here, here, here and here) it was almost inevitable he would be involved in this.
The entire article is worth reading, and if you live in Florida it will be enough to send your blood pressure soaring.
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