Consumer advocates: modelers aid price collusion.

State regulators must exercise the same oversight of catastrophe modeling firms that they do over rate advisory organizations, consumer advocates told a National Association of Insurance Commissioners panel last month.

The speakers cited concerns that "near-term" models that show dramatically greater hurricane risk were being used by insurers to support collusive price increases. They characterized the models as a "black box."

Due to assertions of trade secrets and proprietary data, most states currently do not have the ability or opportunity to review models, according to the Consumer Federation of America and the Center for Economic Justice. They want the NAIC to force modeling firms to disclose their methodologies and the data used to compute their forecasts, and subpoena information on the firms' contracts with insurers, if necessary.

At issue during the public hearing before the NAIC's Property and Casualty Insurance Committee was the March 2006 introduction by Risk Management Solutions of a new windstorm model predicting a 40% increase in landfalling hurricanes in Florida, the Gulf Coast and Southeast relative to the frequencies that would have been predicted using hurricane frequencies from 1900 to 2005.

The problem with using long-term hurricane modeling, according to Mitch Sattler, RMS' vice president of public policy, is that it fails to account for the varying periods of high and low hurricane activity. He said RMS' own model underestimated Atlantic Basin activity for every year after 1994 except the three El Nino seasons of 1997, 2002 and 2006. The 100-year mean also may not properly anticipate changes brought on by climate change, he said.

But CFA Director of insurance J. Robert Hunter and CEJ Executive Director Birny Birnbaum said the choices made by RMS, and subsequently by Eqecat and AIR Worldwide, to shorten the time horizon to five years and to shorten the pricing return period were motivated by industry demand to justify higher rates or withdrawals from certain markets.

"It's clear the insurers put pressure on modelers to come up with a method of raising the price" of coverage, Hunter told the panel.